UK: Small investors secure �125m stake in Direct Line flotation
SMALL investors secured a �125million slice of Direct Line Group today as the insurer made its stock market debut in London’s biggest flotation of the year.
The Churchill and Direct Line insurer drew a big response from retail investors, who were allotted 15% of available shares in what is thought to be the strongest take-up among private investors for at least five years.
Shares were initially priced at 175p and rose nearly 2% in conditional trading, valuing the Royal Bank of Scotland-owned group at around �2.8 billion.
The float raised �787 million for taxpayer-backed parent RBS, which is offloading Direct Line to appease European Union rules on state aid.
But Direct Line was priced at the lower end of City expectations in what was seen as a move to price shares “to go”.
Retail investors now own around 4.5% of the entire Direct Line Group after investing around �5,000 on average each. It is thought an estimated 25,000 retail investors applied for shares ahead of today’s stock market listing.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: “It clearly has captured the imagination of the retail investor.
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“Obviously there haven’t been many similar flotations in the past few years and the fact the shares were fairly well oversubscribed has underlined that.”
RBS floated 30% of Direct Line and will follow today’s share sale with further tranches.
The state-owned bank must sell a majority stake in Direct Line Group by the end of next year and divest of the entire company by the end of 2014 as part of conditions of its �45 billion bailout at the height of the financial crisis.
Paul Geddes, chief executive of Direct Line Group, said he was “delighted” with the level of demand from retail and institutional investors.
While the flotation offers investors the chance to make a potential windfall on Direct Line Group shares, it also puts Mr Geddes in line for a pay package worth up to �3.8 million.
The Direct Line Group boss could pick up a �1.33 million annual shares bonus on top of his �760,000 salary and a further potential �1.5 million in shares as part of a long-term incentive scheme.
But the group has sought to head off a furore over pay at a state-backed business by assuring that shares bonuses will be deferred for three years and subject to clawback.
Retail investors were offered the chance to apply for shares ahead of the float through a network of intermediaries.
Conditional dealings started today, but formal trading will officially start on October 16.
The float was dealt an early blow when the Office of Fair Trading announced last month that it was referring the motor insurance industry to the Competition Commission for full investigation, a process which could drag on for about two years.
It put a question mark over the profitability of Direct Line’s motor insurance business, which represents about 42% of premiums.
Concerns have also been raised over the performance of Direct Line’s UK businesses, some of which are paying out more in claims than receiving in premiums.
But the group returned to profitability last year and has committed to distributing 50% to 60% of after-tax profit as a dividend in what is seen as an attractive proposition for investors, given the record low interest rates.
Direct Line, whose brands Green Flag, Privilege and NIG, has about 18 million UK policies in force and employs about 15,000 people.
But last month it announced proposals to axe nearly 900 roles and close a site in the North East.
The group is planning the redundancies as part of plans to make �100 million of cost savings by the end of 2014.