After well over a year of patient planning, The Royal Bank of Scotland (RBS) Group (NYSE:RBS) finally carried out the IPO for the erstwhile RBS Insurance business as the Direct Line Group.  And it manged to do that quite successfully. The U.K.-based banking group sold off a 30% stake in Direct Line in what was the largest IPO at the London Stock Exchange since last June and the largest retail share offering in about five years. Gross proceeds from the stake sale to RBS are about £787 million ($1.3 billion), which values the Direct Line Group at £2.6 billion ($4.2 billion) (see RBS Sets $4.2 Billion Price For Its Insurance Business As Spin-Off Nears).
Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and UBS (NYSE:UBS) were the bookrunners for this IPO, with Bank of America (NYSE:BAC), Citigroup (NYSE:C) and HSBC (NYSE:HBC) assuming the role of joint lead managers.
We have a $8.90 price estimate for RBS’s stock, around 5% ahead of its current market price.
The Direct Line IPO marks the first step by RBS to fulfill the requirement laid out by the British government as part of the bank’s post-2008 bailout. The European Union state aid rules mandated that the 82% state-owned RBS exit its insurance business within five years, i.e. by the end of 2014. Having trimmed its stake in Direct Line by 30%, RBS will now look to follow up by cutting down the stake to under 50% by the end of next year, and completely exiting Direct Line in 2014.
Interestingly, the success of the IPO presents a brighter picture of the U.K. equity markets which have remained depressed for quite some time now. Moreover, the fact that retail investors lapped up about 15% shares of Direct Line in the IPO also points at an improving risk appetite among small investors – another very good sign. Notes:
- RBS Raises $1.3 Billion in Direct Line’s Initial Offering, Bloomberg Businessweek, Oct 11 2012 [↩]
- RBS sets milestone with upbeat Direct Line flotation, Reuters UK, Oct 11 2012 [↩]