On Friday, as part of the commitment made to the European Union (EU) regulators, The Royal Bank of Scotland Group plc (RBS) announced the initial public offering (IPO) of its insurance wing - Direct Line Group. The bank was under obligation to the EU regulators in exchange of the £45 billion ($72 billion) bailout amount received during the 2008 financial crisis.
Under the EU stipulations, RBS has to sell 50% of the insurance wing before 2013, and the total division by 2014. The company has planned to sell the insurance division in three parts; one in the current year, other in the following year and the final one in 2014. Roughly 25% of Direct Line Group will be offered in the initial share sale.
Direct Line is expected to be valued in the range of £2.5 billion ($4 billion) - £3.5 billion ($5.6 billion), probably the largest public offering on the London Stock Exchange for a period of more than one year. The IPO is anticipated to be completed in the upcoming weeks.
The Goldman Sachs Group, Inc. (GS) and Morgan Stanley (MS) will act as joint global coordinators, sponsors and book-runners for the IPO. UBS AG (UBS) will act as a joint book-runner. The shares will be offered to the general public and institutions through intermediaries.
Management at RBS believes that the insurance company has bright prospects as a separate entity with its ability to provide excellent service to the customers as well as delivering positive returns to the shareholders.
However, many jobs will bear the brunt of this public offering as the insurance firm aspires to realize targets in an effort to develop its profitability as a separate entity. Direct Line has declared that it would axe 900 jobs to achieve expense savings of £100 million ($160 million) by 2014.
Europe has had modest IPO activity over the past year due to the sluggish macroeconomic conditions and unwillingness of companies to sell huge portions of stock at lower rates. Also, regulatory uncertainty has put forward more challenges. Initial interest from private equity firms was also unsuccessful. Despite these uncertainties, RBS has adhered to its plan of selling the investment business.
The Royal Bank of Scotland currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.