London needs a successful IPO of Direct Line Group

David Hellier
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WITH the future of Greece and perhaps the entire Eurozone hanging in the balance, now is probably not the best time to look towards a big initial public offering in the London market.

IPOs themselves have had a dismal few weeks, what with Graff Diamonds postponing its listing in Hong Kong (the doubts over the scheduled deal going ahead were first reported in this newspaper after it emerged that demand was disappointing). Graff’s shelved float was yesterday joined by that of German industrial group Evonik, and both these cancellations come just days after Formula One and Manchester United delayed listings of their own in the far east.

Meanwhile there has been a deathly quiet in London, where there is currently virtually no new issues market give or take a few fund-raisings on AIM, the junior listings market.

So it was somewhat surprising to hear bankers in London yesterday still hopeful there could at least be one major share offering in the domestic market before the end of the year – that of Direct Line Insurance.

Direct Line Group, which includes brands such as Churchill and Direct Line itself, is being offloaded by RBS, the bank majority-owned by the UK government, and must be part sold off by the end of 2013 to satisfy European competition rules.

The group already has three investment banks working on the flotation or sale and it is also interviewing public relations firms that will manage the process in the media.

With a large percentage of the UK general household insurance market – Direct Line has 18 per cent of the motor insurance market and 17 per cent of the household market – the business will undoubtedly be offered to institutions as an anchor income stock with an emphasis on sustainable profitability.

In the first quarter of this year, the group, which is in the middle of a restructuring process, made an operating profit of £84m, up from £67m a year ago.

Equity capital market bankers point to the success of the Norwegian insurer Gjensidige, which raised 10.7bn crowns (£1.14bn) in December 2010. “It was a strong brand name, so there was plenty of demand for the issue,” said one banker. Before he added: “But insurance is a deeply commoditised business.”

Most are agreed that RBS will have to avoid being greedy on pricing. The bank is a forced seller; financial conditions are unlikely to be optimal even by the autumn; and UK institutions will likely only show interest if they can sense there being a bargain to be had.

There could undoubtedly be alternatives to an IPO, such as a trade sale or disposal to a private equity buyer but an IPO seems to be the preferred route at the moment, perhaps in September or October.

How London could do with the deal going well.
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