RBS Prices Direct Line Offering

In an effort to attract investors, The Royal Bank of Scotland Group plc ( RBS ) has priced the initial public offering (IPO) of its insurance wing – Direct Line Group – at a discount. The shares are priced in the range of £1.60 ($2.60) to £1.95 ($3.17) each.

The range’s mid-point makes the insurance business worth £2.66 billion ($4.34 billion), making it the largest UK IPO since Glencore International plc’s IPO in 2011. However, the valuation is 22% less than £3.40 billion ($5.55 billion), as estimated by Commerzbank AG, the co-manager of the IPO. RBS expects proceeds of £650 million ($1.06 billion) to £880 million ($1.43 billion) from the issuance.

RBS is offering about 375–500 million shares, which is estimated to be 25%–33% of the insurance wing. Additionally, the bank has an over-allotment option of up to 15% of the total number of shares issued.

RBS was under obligation to the EU regulators in exchange of the £45 billion ($72 billion) bailout amount, which it received from the latter 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 Goldman Sachs Group, Inc. ( GS - Analyst Report ) , Morgan Stanley ( MS - Analyst Report ) and UBS AG ( UBS - Analyst Report ) are acting as book-runners for the IPO. Additionally, Bank of America Corporation ( BAC - Analyst Report ) , Citigroup, Inc. ( C - Analyst Report ) and HSBC Holdings plc ( HBC - Analyst Report ) are the joint lead managers. These banks will receive roughly 2.6% of sale proceeds as fees, whereas the intermediaries will receive approximately 0.4%.

Management at RBC believes that the investor interest shown in the public offering till date reflects Direct Line’s bright prospects as a separate entity. According to the company's prospectus, released on Friday, Direct Line Insurance Group PLC will debut on the London Stock Exchange on October 11, 2012.

Europe has been witnessing a 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 uncertainties have presented more challenges. Initial interest from private equity firms was also unsuccessful. The discounted valuation demonstrates RBS's purpose to make sure that the offering is successful.

The Royal Bank of Scotland currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.