Analysts value group at £3bn

Direct Line Group

Direct Line Group has this morning announced its intent to float on the London Stock Exchange.

Under the terms of the deal, parent company the Royal Bank of Scotland Group will sell 25% or more of its stake in Direct Line Group as part of its strategy to satisfy state aid obligations and no new shares in the company will be issued.

The offer will be made available to institutional investors and the UK and elsewhere and qualified institutional buyers (QIBs) in the US, as well as intermediaries for retail investors in the UK.

Analysts value Direct Line Group at around £3bn, however city banks advising on the initial public offering (IPO) have warned that the valuation may struggle to reach half of that.

The group has previously been subject of interest from a number of private equity bidders, as reported in Insurance Times.

Direct Line Group chief executive Paul Geddes said: “Our people have worked hard in recent years to transform the business, scale and market-leading brands. Our work to maximise these advantages is by no means complete and we have a clear strategy that spans distribution, pricing, claims and operational efficiency.

“We look forward to being a listed company and are more committed than ever to providing customers with excellent products and service levels, while seeking to deliver sustainable returns for our shareholders, targeting a 15% return on tangible equity from ongoing operations.”

Shore Capital analyst Eamonn Flanagan valued Direct Line Group at between £3bn to £3.2bn.

“To us, the best comparator is RSA which is currently trading at 1.2 times our 2012 forecast net asset value (NAV), 1.5 times our 2012F NTAV with a forward yield of around 8% (covered 1x for 2012F, rising to 1.1x for 2013F),” he wrote in a research note.

“Applying a small discount to this figure, to allow for the ‘overhang’ effect and because RBS does need to offer some upside to potential new investors, would deliver a range of between £3bn and £3.2bn … this equates to between 1.1x and 1.2x NAV, between 1.3x and 1.4x NTAV and a forward yield of between 5.5% and 7%. In our view, an interesting play in the non-life space but, for preference, we would prefer the RSA story with it proven track record (c95% combined ratio) and the strength of its presence in the likes of Scandinavia and Canada.”       

The sale, which was ordered by European regulators, is being led by Goldman Sachs, Morgan Stanley and UBS.

RBS is likely to implement a three-tranche sale of Direct Line - one this year, one next year and a final sale in 2014.