Direct Line makes largest London IPO of year priced at 175p

 

The insurance arm of Royal Bank of Scotland begins trading today in the largest London listing of 2012.

Shares in Direct Line will come to market priced at 175p each, valuing the company at £2.6bn. The offer comprises 450m existing shares, representing 30% of the 1.5bn total, and should raise £787m for RBS.

RBS had previously said it would float the firm at between 160p and 195p a share.
RBS has been compelled to sell the subsidiary as a condition of the £45bn it received in bailout cash from the UK government in 2009 following the financial crisis. The bank must sell a majority stake in the group by the end of next year and it all by the end of 2014.
Direct Line is 25 years old, and own several recognisable brands including Churchill, Green Flag and Privilege.
The business is undergoing a cost-cutting drive said to include axing 900 of its workforce of 15,000 in order to make savings of £100m a year.
The float is expected to prove popular with investors in an environment in which several companies have shelved plans to list until global growth picks up.
Direct Line may also appeal to income investors as the firm is expected to pay a dividend in the second quarter of 2013.
Hargreaves Lansdown's head of equities Richard Hunter said the firm has excellent market share in the UK, with almost 20% of the motor and home insurance market. It has economies of scale and its cost-cutting plans will further improve the profitability of the business, he added.
"Direct Line Group is among the biggest insurance companies in the UK with well-recognised brands, an established market share and a 27-year track record. Recent results show a return to profit and a high cashflow," Hunter said.
"Given the profile of the launch, it should attract investors' attention. It is not every day a company of this size comes to market."
Andrew Caldwell, valuations partner at BDO LLP, is less positive on the 'forced sale', suggesting growth in the business could be limited.
"There appears to be little room for any major increase in profits arising from growth in market share and revenue; means the future growth in value is uncertain," he said.
"However, the group's advisors have cleverly marketed the shares to retail investors, whose appetite has been whetted by the absence of any recent sizeable opportunities.
"The suggested pricing range seems to indicate these investors have a slightly rosier view of the future and that the proportion of the shares going to such investors may be higher than originally anticipated. It will be interesting to see the outcome."