Small investors hold key share as Direct Line float nets RBS £800m

By PERRY GOURLEY
Published on 11/10/2012 23:42

THE flotation of Direct Line yesterday saw RBS raise almost £800 million and small investors secure a significant slice of the shares in the UK’s biggest initial public offering of the year.

The group, also behind brands including Churchill, Green Flag and Privilege, attracted big demand from retail investors who were allocated 15 per cent of available shares, worth £125m. It is thought to be the strongest take-up among private investors in a flotation for at least five years.

Shares were initially priced at 175p – towards the middle of a previously announced range of 160p to 195p – valuing the group at about £2.63 billion.

In their first day of conditional trading, they rose as high as 189.25p but edged back to close at 188p.

Floating 30 per cent of the company raised £787m for parent RBS, which is offloading Direct Line to appease European Union rules on state aid.

Retail investors now own around 4.5 per cent of the entire Direct Line group after investing an average of £5,000. It is thought an estimated 25,000 retail investors applied for shares ahead of yesterday’s stock market listing.

Paul Geddes, chief executive of Direct Line Group, said he was “delighted” with the level of demand from retail and institutional investors.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said the float “clearly has captured the imagination of the retail investor”.

“Obviously there haven’t been many similar flotations in the past few years and the fact the shares were fairly well oversubscribed has underlined that.”

RBS will follow yesterday’s share sale with further tranches. The part-nationalised bank must sell a majority stake in Direct Line Group by the end of

next year and divest of the entire company by the end of 2014 as part of conditions of its £45bn bail-out by the UK taxpayer at the height of the financial crisis.

Analyst Eamonn Flanagan at brokerage Shore Capital said the offer price was a “reasonable outcome”, although the company’s value is below the

cut-off point of about £3bn for inclusion in Britain’s elite FTSE 100 share index.

“Although below what we believe the group expected to be valued at the start of this process, this is a reasonable outcome for Direct Line,” said Flanagan.

The insurer has pledged to pay up to 60 per cent of its profit in dividends to shareholders, giving its shares an estimated yield of about 7 per cent, far exceeding low single-digit returns on most bank savings accounts.

However, Flanagan pointed out that his preferred buy in the sector was rival RSA due to a “circa 8.3 per cent prospective forward yield, its greater geographical spread and the better quality of management”.

Direct Line’s IPO could encourage other companies already considering a London listing to selling shares to the public in what has been a lean period for flotations.

Investment banks Goldman Sachs and Morgan Stanley are in line to share fees of as much as £17.4m with the other eight banks involved in the sale of Direct Line shares to institutional investors.