The Royal Bank of Scotland (RBS) has confirmed that it will commence a flotation of its Direct Line insurance division.
RBS is 81 per cent owned by the UK taxpayer, following a government bailout in 2008 at the height of the financial crisis.
As a consequence of receiving the state aid, European regulators insisted that the bank had to sell the UK’s biggest car insurance firm, Direct Line.
Analysts have estimated that the initial public offering (IPO) could raise up to £4 billion. However, due to tough market conditions a more realistic expectation is £2 billion.
A German company, Talanx AG pulled its planned IPO this week for the second time in three months after investors tried to push for what Talanx said was an "excessive discount."
RBS is concerned that investors may try to do the same thing. However, it believes the business, which has around 8.5 million UK home amd motor insurance customers provides a different investor story due to its core business being based in the UK.
City banks who are advising RBS on the IPO warned that scepticism from investor syndicate members on IPO’s at the moment makes it likely that in order to sell they will have to offer Direct Line shares at a discounted price.
However, RBS has been preparing the IPO for over a year and say that there has been a lot of interest.
Direct Line Chief Financial Officer John Reizenstein told reporters on a conference call that: “We’ve had lots of discussions with institutional investors for about a year and there’s a lot of interest,”
RBS Finance Director Bruce Van Saun said: "We believe it has a strong future as a standalone insurance group, continuing to serve its customers well while delivering attractive returns to investors."
If RBS considered that they are being offered too low a price for the business, the bank could sell out to a private equity group instead or ask European regulators for an extension to the deadline for sale.
Under the EU directive, RBS needs to have sold more than 50 per cent of its Direct Line shares by the end of 2013 and all shares one year after that.
RBS is under pressure to make the sale but will also be required to sell at a decent price as UK taxpayers sit on a £20 billion loss.
RBS has always intended to float the business but has had offers from private equity firms including Bain Capital and Blackstone, however, it decided they were not good enough.
Direct Line is now the UK’s biggest motor insurer with more than 10,000 employees and ten million insurance customers across Britain and Europe.
Twitter: My Finances
Join the conversation at #news_myfinances