RBS’s Stake In Direct Line Drops Below 30% Raising $1 Billion In The Process

by Trefis Team
Royal Bank of Scotland
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Late last week, The Royal Bank of Scotland (RBS) Group (NYSE:RBS) sold 300 million shares in the Direct Line Insurance Group in what comes as yet another step by the global banking giant towards fulfilling the requirements laid out by the European Commission (EC) at the time of its bail-out in 2009. [1] The stake sale is the second this year and brings RBS’s holdings in the erstwhile RBS Insurance group to 28.5% – well within the EC-mandated level of under 50% by the end of 2013. The banking group, in which the British government has a 81% stake, should be able to comfortably meet the requirement of divesting all its stake in Direct Line by the end of 2014.

Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), RBC (NYSE:RY) and UBS (NYSE:UBS) were the joint bookrunners for this stock offering.

We have a $11.00 price estimate for RBS’s stock, around 5% lower than its current market price.

See our full analysis for RBS here

In return for its £45.5 billion bailout in the aftermath of the global economic downturn of 2008, the European Commission laid down a list of restrictions as well as compulsory divestments that RBS had to undertake over the following years. ((Darling hails Lloyds and RBS move, BBC News, Nov 3 2009)) The requirements included the disposal of the group’s Global Merchant Services (WorldPay), RBS Sempra Commodities and a 316-branch network by the end of 2013, and a complete exit from the insurance business by the end of 2014. [2] The restrictions imposed also forced the group to cut down on investment banking operations to stay out of the list of top five global debt originators with RBS being banned from restarting its non-core activities until the end of 2014. ((Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012))

RBS has stuck to the restrictions and sold out of its stake in WorldPay and RBS Sempra Commodities. Only the branch sale (dubbed Project Rainbow) and the Direct Line Insurance Group spin-off remain, with the former being unfortunately snagged by technology and separation-related complexities. [3]

RBS spun off its insurance operations as the Direct Line Group last October after contemplating a series of options for the business unit for well over a year, seeing an IPO as the best option to unlock value in what is Britain’s largest motor insurer and also one of the largest general and home insurers in the region. The bank sold a 34.7% stake in Direct Line as part of the IPO with gross proceeds of about £787 million ($1.3 billion) (see RBS Sells 30% Direct Line Stake In Successful IPO). A round of stake sale followed five months later, with RBS getting rid of an additional 16.8% stake this March for gross proceeds of £507 million ($800 million). [4]

The latest stake sale shrunk RBS’s holdings in Direct Line by an additional 20% – leaving a 28.5% stake that will need to be gotten rid of by the end of next year. Once that is done, the bank can bid adieu to what was once a dependable source of income. Quite notably, the Direct Line stake adds more value to RBS’s business model compared to its Ulster Bank business in Northern Ireland, as shown in the chart below.

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  1. RBS sells part of its holding in Direct Line Group, RBS Press Releases, Sept 20 2013 []
  2. Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012 []
  3. UK’s Nationwide interested in buying RBS branches, Reuters, Nov 27 2012 []
  4. RBS Completes Partial Sale of Direct Line Group Ordinary Shares, RBS Press Releases, Mar 2013 []
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