By Vladimir Guevarra
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Royal Bank of Scotland Group PLC (RBS.LN), which Tuesday said it will spin off its insurance arm as part of European Union-agreed restructuring plan, would be best-served by floating the unit in an initial public offering, especially given the long timeframe it has to make a move, analysts said.
As part of sweeping measures to meet EU competition requirements, RBS said it will divest its insurance business over the next four years, along with selling off its global merchant services unit and its interest in commodities trading joint-venture RBS Sempra Commodities.
RBS said that "divestments will be timed to maximize value and may be effected through initial public offerings, agreed sales or a combination of these. In particular, RBS Insurance is seen as a potential IPO in the later years of RBS' strategic plan."
RBS Insurance underwrites and sells insurance over the telephone and the Internet, as well as through brokers and partnerships. Its brands include Direct Line, Churchill and Privilege, Green Flag and NIG. Through its international division, RBS Insurance sells general insurance, mainly motor insurance, in Germany and Italy.
"An IPO looks like a sensible move," Panmure Gordon analyst Barrie Cornes said.
Cornes said that if RBS Insurance is floated over the next four years, "it will allow the non-life pricing cycle to recover and would obviate the need to find one buyer with the asking price that might be a big ask in the current environment."
Gordon said that "a price closer to GBP5 billion was realistic compared with the GBP7 billion talked about" last year when RBS was looking for a buyer for its insurance business.
"We believe that the price would be lower than the GBP5 billion if RBS were a forced seller," he said.
Oriel Securities analyst Thomas Dorner said an IPO of RBS' insurance operations "will generate a lot of interest from investors" given RBS Insurance’s strong position in the U.K. non -life market.
"However, the fact that the disposal is seen as likely to occur 'in the later years' of the four-year strategic plan suggests that there is unlikely to be a strong operational impact on other players until then. So for now it looks like business-as-usual in the U.K. non-life market," Dorner said.
Dorner said it is more likely for RBS to float the business rather than make a trade sale because RBS may be hopeful of getting a better price for it through an IPO in a few years. Also, the operations of the brands may be very integrated and so couldn't be easily broken up, Dorner said.
Dorner noted that RBS disclosed that the insurance business had GBP4.2 billion of capital at the first half of the year.
"If you put that on a sensible 1.2 times book multiple, that implies it should be worth around GBP5 billion," he said.
Dorner said that during a conference call, RBS said it could wait for profits to improve before floating, "so this price tag is likely to increase by the time they IPO."
Company Web site: www.rbs.com
-By Vladimir Guevarra, Dow Jones Newswires. Tel. +44 (0) 2078429486, vladimir.guevarra@dowjones.com