There must be an alternative to a Direct Line flotation

David Hellier
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Despite rumblings from analysts that Direct Line might jettison an IPO in favour of a sale to a private equity bidder, RBS has in recent weeks firmly batted away indications of interest from would-be buyers. Instead it has been making it abundantly clear to a number of frustrated investment bankers that it wishes to persevere with the sale of a tranche of shares to public shareholders, almost at any cost.

“This is a monopath exercise,” says one banker, who was earlier in the process interested in putting together a private equity bid consortium. “People keep hoping there will be an M&A track but at the moment it just doesn’t exist. RBS is hell-bent on an IPO path,” the banker said.

City analysts, aware that Direct Line could end up being priced very cheaply in an IPO process – some say it might need to be priced as low as £1.5bn to gain support, which is only around two-thirds of its book value – have speculated that an alternative strategy might need to be resurrected at some point.

Several potential bidders have indicated interest, including one consortium headed by the former RSA chief executive Andy Haste, who has tentative financial backing from Bain and Advent Capital.

It is widely understood that this bid was being advised on by Evercore and a so far unnamed adviser to the IPO syndicate. There is also speculation, reported to bankers from a member of the management team, that another bank acting on the IPO process sought permission to get a special dispensation to act for a rival bidder but was declined.

The RBS board, chaired by Sir Philip Hampton, is keen to follow the IPO route expecting to gain from riding the up-side in sentiment towards the stock following a flotation.

“The first tranche of 25 per cent or so might end up being sold cheaply but the bank is confident that the shares will go forward strongly from there making a further sale of shares possible at a stronger price,” said a banking source.

The government, which owns a majority stake in RBS, is also said to favour the IPO path, with some pointing out that a private equity bidder would require months and months of investigation from the regulators before it was able gain control of an important insurance group.

Direct Line is a solid profitable business with a healthy prospective flow of dividends but it is also considered low growth and unexciting. Institutions, who have shunned several IPOs in the past few months, have made it clear they will not overpay for the business.

The question for Goldman Sachs, Morgan Stanley and UBS, the lead bankers on the deal who are being squeezed in any case in terms of their fees, as they speak to the institutions is: do they need a Plan B?

To have nothing in place risks giving the risk averse institutions no tension at the bottom end of the pricing range; no fear of losing the deal if they only bite at a ridiculously low price.

“There’s absolutely no competitive tension being written into this process at all,” lamented one banker yesterday.

The best way of ensuring a successful IPO is to re-ignite the prospect of a rival bid, and to do that right now. Sadly it may already be too late.
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