Direct Line Is Off and Running

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RBS’ (LSE:RBS) divestment of it insurance arm, Direct Line Group (LSE:DLG) has officially begun with limited trading in this year’s IPO Derby.  Opening at 175.00, the share price was off and running to 186.80 mark shortly after 1:00 pm.  The 450 million shares were being gobbled up like a horse that hadn’t eaten in a week with a fresh bucket of oats.

Although an official register of shareholders will not be available for several days, it is known that some 25,000 private investors have accounted for about 15% of the total shares offered.  Early reports are the North American institutional investors have acquired about 33% of the shares, whilst UK institutions are believed to account for some 50%.

The initial response bodes well for RBS as it has been under pressure from European regulators to divest Direct Line as part of the bailout arrangement whereby the British tax payers gained 82% ownership in the parent company in 2009.  In fact the mandate to sell off Direct Line creates what at least appears to be a buyer-leveraged IPO.  Investors tend to believe that the initial trading of DLG is a good deal, if for no other reason that that RBS must sell.

This is really just the beginning of the process.  The tranche of shares is the first of several more to come.  In fact, today’s offering represents only 30% of the 1.5 billion shares that will be offered at full admission to the LSE.  RBS has the right to make an additional 4.5% of the Direct Line share during this initial period to help satisfy the strong demand.    The IPO will keep RBS in compliance with the divestment requirements, by which it must sell a majority of Direct Line Share by the end of 2013, and divest completely by the end of the following year.

Whilst there are always contrarian opinions, the outlook for Direct Line seems to be quite positive, as investors have exhibited today.  The insurance sector has been doing better overall recently, so that bodes well.  There is also valid reasoning that once DLG is out from under the RBS wings, investor pressure will drive the company to seek greater efficiencies of operation.  The fact that Direct Line recently announced the elimination of 900 odd positions is a bit of an indicator that it has not been accustomed to running very lean.  Accountability to direct investors will change that.

RBS will be raising in excess of £787 million through the Direct Line IPO.  As for the Direct Line investors, putting a chunk of cash into the company is surely a better deal that letting that money sitting in a bank.  Prior to the IPO the company had already announced that 60% of its profits would be returned to investors in the form of dividends, giving them about a 7% yield.

After the BAE-EADS merger went into a tailspin yesterday, the Direct Line IPO can be considered as a good insurance policy.

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