D IRECT Line was always going to be a major test for the London listings market. Finally, it has got away, so there will be relief all around about that, even though the insurance group will not jump straight into the prestigious FTSE 100 as many at the outset had hoped for.
There was a time during the process when many believed that a private equity deal, which would have taken Direct Line off RBS’s hands lock stock and barrel, would have been the preferred solution.
But the selling of shares to the public and institutions has multiple attractions. If it turns out in a few years’ time the asset was sold off cheaply, there will be less criticism of RBS or its 82 per cent shareholder, Her Majesty’s Government, than if it had sold lock stock and barrel to a private equity group that then walked off with a whopping profit two to three years down the line.
What of the effect for London’s nearly dead IPO market? There is a chance that the success of the Direct Line IPO will be massively positive. When the group announced its intention to float, there was an almost quivering of the lips amongst the City’s investment community, worried that a failure to sell the deal would signal the death knell for an already badly scarred market.
Since Glencore raised £6.2bn last May, there has been negligible action on London’s main market for flotations. Polymetal, a Russian-based metals group, raised just short of £500m last November, Ophir Energy raised £230m and there have been a few other morsels but participants have been largely sitting on the sidelines. On the whole, UK institutions have refused to play ball.
Buyers, especially the traditional UK institutions, have squealed that newly-listed groups have been priced too sharply, with advisers to private equity groups (STJ and others) arguing that the buyers were trying to buy equity on the cheap.
Of course, Direct Line, which is being forcibly sold off by RBS for regulatory reasons, does not fit the profile of many companies coming to market. RBS is selling because it has to, and therefore the price it was prepared to accept was not as crucial as the event of a sale itself.
With private equity sellers, there have been too many recent examples of assets being offered to the market at unrealistic prices. Either the deal fails altogether, as in the case of Edwards (which later floated in New York instead), or it goes ahead and the share price performance of the company in question is so poor that the group becomes another name in the roll-call of IPO disappointments.
UK institutional shareholders have become disillusioned by it all, so it is not altogether surprising that US institutions accounted for a large proportion of the demand for Direct Line. Hopefully, the Direct Line experience, which has seen Goldman Sachs, UBS and Morgan Stanley setting what looks like a realistic price, will help restore confidence.
But it is too early to say that the feel-good factor being experienced yesterday will last too long.
The whole new issues business in London will be praying for a good share price performance in the days ahead and hoping that Direct Line doesn’t produce any unexpected bad news going forward.
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