Direct Line Sets 175p Float Price

Published in Company Comment on 11 October 2012

Royal Bank of Scotland (LSE: RBS) should raise at least £787 million.

Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) kept steady at 263p in early trade this morning after the bank announced its Direct Line (LSE: DLG) insurance subsidiary is to be sold for 175p per share.

The FTSE 100 (UKX) member confirmed up to 518 million shares in Direct Line would be offered to investors. The flotation is expected to raise gross proceeds of at least £787 million for RBS.

Direct Line's market cap at 175p a share will be £2.6 billion, which would place the insurer towards the top of the FTSE 250 index and just outside the FTSE 100.

Direct Line shares will begin full trading on the main market on Tuesday, 16 October. Conditional dealings in the shares, whereby institutions trade on the basis of settlements being made after the flotation, started today at 8am.

Following admission, RBS will retain a 65%, or £1.7 billion, stake in Direct Line. The insurer's mangers will own shares with an aggregate £760,000 value.

RBS is essentially a forced seller of Direct Line. The flotation is the first step to satisfying the disposal commitment made to the European Commission after the bank received a taxpayer-funded bailout during 2009. RBS must sell its remaining 65% stake in Direct Line before the end of 2014.

Commenting on today's announcement, Paul Geddes, chief executive of Direct Line, said:

"We are delighted with the level of demand institutional and retail investors have shown in Direct Line Group, reflecting the recognition of our clear strategy and key strengths of distribution, scale and market leading brands. We look forward to life as a publicly listed company with the support of a strong and diverse shareholder base."

Direct Line may offer prospective investors some attractive features. In particular, the business claims to have a market-leading position in both home and motor insurance, with an 18% share of each and a total of 8.5 million in-force policies.

Furthermore, the business intends to pay between 50% and 60% of its post-tax profits as a dividend, as well as adopt a "progressive" payout policy thereafter. Direct Line has said it expects to pay its first dividend in the second quarter of next year.

Direct Line's impending flotation could be one to watch, as industry rival Admiral (LSE: ADM) rallied from a start price of 275p to as high as £17 after its 2004 listing.

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Further Motley Fool comment on Direct Line:

> Maynard does not own any share mentioned in this article.

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UncleEbenezer 11 Oct 2012 , 12:23pm

My email this morning also explained share allocations: applicants get 100% of the first £1k, and 65% thereafter, capped at £100k total allocation. I presume other applicants have the same news?

Clitheroekid 11 Oct 2012 , 6:14pm

With an allocation like that it's hard to see them going to much of a premium, if any, unless the market generally strengthens significantly before Tuesday.

I would expect a big sell-off in the first few days by small shareholders who had hoped to make a profit but now just want to get their money back.

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