German insurer cancelled its flotation plans two days before DLG announcement


German insurance group Talanx’s decision to withdraw its initial public offering (IPO) has added to the list of challenges facing Direct Line Group’s (DLG) path to flotation.

Talanx pulled its IPO two days before DLG’s parent RBS announced it was starting the listing process for its insurance arm.

Talanx said it took its action because investors’ valuation expectations fell short of the company’s, underscoring the fact that getting reasonable valuations in the current depressed stock market is difficult.

DLG chief executive Paul Geddes (pictured) has shrugged off suggestions that Talanx’s IPO withdrawal will hit his own firm’s listing prospects.

He said: “We think the Talanx deal is significantly different from ours for lots of reasons. One is that they are 80% life and reinsurance and only 20% property/casualty.

“We believe from the advice that we have received that it is not a direct read-across for us.”

But analysts disagreed.

Canaccord Genuity analyst Ben Cohen said: “There is limited read-across but obviously it is not helpful because it is in the same broad sector.

“Given that the process was always going to be a tough one as RBS is a forced seller, it just gives the price-conscious buyers another stick with which to beat the company.”

IPO announcement

DLG announced on Friday that RBS was starting the IPO process and would list a minimum of 25% of the insurer on the London Stock Exchange this year.

A prospectus will be released and the offering price and size determined “in the next few weeks”, according to DLG chief financial officer John Reizenstein.

DLG’s potential valuation faces pressure from the challenges in the UK personal lines motor market.

Oriel Securities analyst Marcus Barnard said: “The UK motor market is mature and cyclical. There is not that much opportunity for growth. We know premiums are under pressure and we know the trend for claims costs have been upwards over the past few years. Against that background, it is not particularly appealing, especially when you take account of low interest rates.”

As RBS is a forced seller, it just gives the price-conscious buyers another stick with which to beat the company”

Ben Cohen, Canaccord

DLG’s eventual valuation also faces pressure from the potential threat to all insurers’ ancillary income from the Jackson reforms and the possible Office of Fair Trading probe into UK motor insurance.

The company reported a 26% drop in ‘other income’ to £98.8m in the first half of 2012 (H1 2011: £134.2m).

It is not clear what valuation RBS is seeking in the DLG float, but analysts suggest it will be looking for book value. That was £2.9bn at the end of the first half of this year and tangible net asset value was £2.5bn.

Private equity options

If RBS fails to get what it wants from the stock market, it could re-approach private equity buyers.

Duke Street Capital founder Edmund Truell is understood to be keen to step in if DLG’s float fails.

Shore Capital analyst Eamonn Flanagan predicts the company could fetch between 1.1 and 1.2 times its book value, giving a valuation of £3bn to £3.2bn.

He said: “It is not going to go well below book value because at that point, why would RBS just sell 25%? You might as well go back to private equity and say: ‘You can have the lot for £2.7bn or £2.6bn’.”

DLG performance

Talking points

● What will DLG’s stock market valuation be? While ideally around £3bn, some analysts fear it could
be less.

● What effect will the float have on DLG rivals? Esure and Hastings intend to float and their valuation will be affected by what happens.

● DLG chief executive Paul Geddes (pictured) could get a multimillion pound bonus at year’s end. How will taxpayers feel about that if the flotation goes awry?