Although early indications are positive, the company still has to go through some challenges before it starts trading properly
After much rumour-mongering, speculation and anticipation, Direct Line Group has finally floated on the London Stock Exchange. It listed under the ticker DLG at 8am today at the offer price 175p a share.
The early indications are good. The stock started trading on a conditional basis at 8am at 183.17p - 4.6% higher than its official offer price - and had risen to 185p by midday.
This suggests that Direct Line got the pricing right for its initial public offering (IPO), and that retail investors have largely ignored some analysts’ calls to give the offering a wide berth.
As a further indication that the IPO has gone well, Shore Capital analyst Eamonn Flanagan, who has not been shy of criticising Direct Line Group and pointing out its weaknesses, wrote in a research note this morning that the price was a “reasonable outcome”. Geddes himself described the price as “sensible”.
Of course, this is only the beginning of the story in many respects. Even in this offering, more milestones remain to be reached. Unconditional trading starts on Tuesday, which is when the company will trade freely, like any other stock on the exchange.
Some investors, particularly retail investors, tend to avoid the conditional trading period as the exchange of cash and share certificates is deferred until unconditional trading starts, presenting a risk.
Another milestone is the expiry of the 30-day over-allotment period. This effectively act like the stabilisers on a child’s bike, allowing the supporting backs to issue more shares than planned and buy them back to counteract any wild swings in price.
Only when this period is over will Direct Line be trading unaided and subject to all the rigours that its peers are on a daily basis.
Then there are the subsequent offerings by majority owner RBS. It has to sell its entire stake in Direct Line by the end of 2014 and has only sold 305 this time around. A further two issues are on the cards.
While the next offering does not need to happen for some time, some analysts and observers note that these further issues are hanging over Direct Line’s head. It remains to be seen what effect the subsequent issues will have on the share price, but new issues of stock increases supply, which usually lowers price.
But for now, Direct Line can bask in the success of a job well done.
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