Bank confirms Direct Line sell-off

RBS, 81 per cent owned by the taxpayer, will brave tough markets with an initial public offering (IPO) of Direct Line shares over the next few weeks.

RBS is being forced to sell Direct Line, owner of the Churchill, Privilege and Green Flag brands, as a condition of taking state aid in its 2008 bailout.

Documents published yesterday to prepare for the float revealed Direct Line has paid RBS £1bn in dividends this year.

Analysts said the IPO should value Direct Line at between £2.5bn and £3.5bn, although warned achieving a decent price may prove tough.

“The recent pulling of the Talanx IPO in Germany does not read across positively for RBS, suggesting it remains a buyer’s market, which may frustrate RBS’s valuation expectations,” said Oriel Securities analyst Vivek Raja.

Charles Stanley analyst Nic Clarke added: “Many are questioning investors’ appetite for a substantial IPO given the uncertain market backdrop. The other key question, given that backdrop, is whether investors will need a substantial discount to book value (around £3bn) to entice them into purchasing the shares.”

Direct Line is targeting a 15 per cent return on equity, and has already revealed a wave of 900 job cuts, part of plans to achieve £100m of cost savings by 2014.

Direct Line finance director John Reizenstein said it has held positive talks with investors.

“We’ve had a lot of discussions with them over the past year and there’s a lot of interest,” he said, adding that the IPO is expected to complete in the next few weeks.

The Bromley, Kent-based insurer employs 15,100 staff, including about 3,700 in Yorkshire, and also has operations in Germany and Italy. It has three sites in Leeds employing more than 3,000, plus a centre in Doncaster.

The insurer has 4.2m live motor insurance policies and 4.3m home insurance policies, giving it market shares of 19 per cent and 18 per cent respectively.

Chief executive Paul Geddes said: “Our people have worked hard in recent years to transform the business in order to take advantage of our distribution, scale and market-leading brands. Our work to maximise these advantages is by no means complete and we have a clear strategy that spans distribution, pricing, claims and operational efficiency.”

RBS must sell 50 per cent of Direct Line by the end of 2013 and has until the end of 2014 to sell the insurer completely.

RBS finance director Bruce Van Saun said: “We believe it has a strong future as a standalone insurance group continuing to serve its customers well while delivering attractive returns to investors.”

If the flotation does not succeed, RBS could be forced to ask the European Union for an extension. It will also be under pressure to secure a good deal for taxpayers, who are sitting on a £20bn loss after its £45bn bailout.

RBS plans to sell Direct Line in three tranches, with around 25 per cent sold in the initial IPO. No new shares will be issued.

Oriel Securities said the shares could be offered at 170p each, which would value Direct Line at just £2.6bn.

The insurer pledged to pay a full final dividend for the 2012 financial year, and said this will likely be 50 to 60 per cent of consolidated post-tax profits. It plans a “progressive” dividend policy.

Direct Line reported a seven per cent rise in operating profits to £224.2m in the first half of 2012. It recently secured a five-year contract with Sainsbury’s Finance to provide home and car insurance.

The group also introduced a new management system to deal with motor claims at Churchill, Direct Line and Privilege, as well as new home claims at Churchill,.

Leeds-based stockbroker Redmayne-Bentley has been appointed an intermediary through which investors buy shares in the insurer. Head of operations, Tim Archer, said: “We are pleased to see that private investors will be able to apply for shares, as part of the proposed IPO, in a company that owns familiar household names such as Direct Line, Churchill, Green Flag and Privilege, amongst others.