The Royal Bank of Scotland (RBS) Group (NYSE:RBS) inched closer to the spin-off of its insurance business by finalizing the value of the business earlier this week. [1] The insurance business, which was rebranded as the Direct Line Group late last year, has been valued at £2.6 billion ($4.2 billion). The proposed valuation is below £2.7-£2.9 billion ($4.4-$4.7 billion) estimated by analysts, and at a considerable discount to the the £3.4 billion ($5.5 billion) valuation proposed by some of the investment banks managing the deal to various fund managers. Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and UBS (NYSE:UBS) have already begun the book-building process for the stock market launch.
We have a $8.90 price estimate for RBS’s stock, around 5% ahead of its current market price.
See our full analysis for RBS here
The Direct Line Group (formerly RBS Insurance) underwrites and sells retail and small and medium-sized enterprise (SME) insurance and is the largest personal lines insurer in the U.K. with brands like Direct Line, Churchill and Green Flag. Through its international division, RBSI also sells general insurance in Germany and Italy. The British government had mandated that RBS exit its insurance business by mid-2013 as a prerequisite to the banking group’s bailout during the global economic recession of 2008. Since then, the 82% government-owned RBS Group has been slowly preparing for the exit, with the bank deciding to spin off the business as a separate entity by floating its shares in the equity market instead of selling it.
The demand for a discount in the opening price by institutional investors is what led to RBS settling for the proposed £2.6 billion ($4.2 billion) valuation for the business. We can also be sure that the discount is not very heavy, as the U.K. government has been following the spin-off very closely to safeguard the value of its stake in RBS.
Shares of the Direct Line Group are likely to be floated in multiple chunks, starting with the first batch for about 30% of the stake. It must be noted here that RBS already took a dividend payment of £1 billion ($1.6 billion) from the Direct Line Group earlier this year (see RBS Looking at $1.5B Insurance Group Dividend). So, once the spin-off is complete, the banking group will have pocketed about £3.6 billion ($5.8 billion) from exiting the insurance business.
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Notes:- Direct Line to be valued at about £2.6bn, Financial Times, Sept 26 2012 [↩]
