By Margot Patrick
LONDON--Faced with a tight deadline, Royal Bank of Scotland
Group PLC (RBS) is to push ahead with its initial public offering
of its Direct Line despite a setback after a rival deal from German
insurer Talanx AG was pulled late Wednesday.
People familiar with the matter said a formal launch of the IPO
is likely to be made Friday, as the 83%-state owned bank aims for
an October completion of the roughly GBP1 billion share offer. They
said it was still possible the transaction will be delayed, though,
or even scrapped in favor of a private sale.
A banker close to the Direct Line transaction said Talanx's
decision to cancel its offer was specific to that company and its
ability to wait indefinitely for a potentially higher valuation.
RBS, meanwhile, must sell at least half of its Direct Line stake by
the end of next year to meet European Union conditions on its
2008-09 government bailout.
Talanx's move "will no doubt send shivers down the spines of RBS
executives who had been banking on getting Direct Line IPO done at
a decent price," analysts at Oriel Securities said in a note
Thursday. They said they expect the Direct Line IPO to go ahead,
"at a realistic price."
Price is key in any IPO, but even more so for Direct Line
because of the impact on the U.K. taxpayer if it were to be sold on
the cheap. Since injecting cash into RBS in 2008 and 2009, the
government has been unable to sell down any of its stake because of
persistent weakness in the bank's share price, leaving taxpayers
about GBP20 billion out of pocket on the investment as of
Thursday.
Analysts value Direct Line at around GBP3 billion, before
accounting for any IPO discount. About 25% to 30% of the company is
to be offered in the initial share sale, with additional tranches
to follow.
RBS in 2009 agreed as a condition of its state aid to sell a
majority stake in Direct Line by the end of 2013 and divest the
business completely by the end of 2014. Several private equity
firms have shown interest, but an IPO is the bank's favored option
because it should warrant a higher price and allows RBS to keep an
interest in the insurer's earnings for a couple more years.
RBS Finance Director Bruce Van Saun on Monday told investors in
New York that the IPO is set to be completed in the fourth quarter,
calling it one of the bank's "milestones" as it seeks to shed
government support.
Europe's IPO market has had a poor year, with
PricewaterhouseCooper tracking just EUR2.3 billion raised in the
first half of 2012, down from GBP16.26 billion in the same 2011
period.
-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451;
margot.patrick@dowjones.com