February 24, 2013 10:13 pm

Direct Line listing advisers to get bonus

Royal Bank of Scotland has agreed to make an additional multimillion-pound payment to the investment banks that handled the listing of Direct Line, on top of an initial fee.

The state-backed lender has agreed to pay the discretionary sum, estimated at about £7m, to banks led by Goldman Sachs and Morgan Stanley, people familiar with the matter said.

The part-nationalised ­status of RBS, which has been forced to dispose of its insurance arm to comply with state aid rules, makes the fees for advisers potentially ­contentious.

But people close to the bank said they had to overcome a moribund market for listings, as well as investors who were sceptical about growth prospects of a competitive industry.

RBS agreed to pay the discretionary sum because it was satisfied with the flotation, they said, netting its advisers some £20m in fees including the payment.

It hired 12 institutions to handle the offer, which attracted about 25,000 individual investors as well as a disproportionate number of US-based institutions.

The successful listing has paved the way for other stock market launches.

Esure, another motor insurer, is expected to fire the starting gun on its planned float this week.

The owners of Direct Line’s smaller rival, who are planning to sell between a third and half of their stake, and private equity backers Tosca Penta, are hoping to raise between £200m and £300m.

People close to Esure hope its IPO will value the group at about £1bn.

However, prospective investors in Direct Line were wooed with a lower-than-expected offer price after top fund managers warned the initial sums RBS mooted were too high.

Since being floated at 175p Direct Line shares have outperformed the FTSE 350 insurance index 11 per cent and closed on Friday at 210p. The listing raised more than £900m for RBS, which still has a 65 per cent stake.

Investors will be scrutinising Direct Line’s dividend declaration on Thursday as the group discloses its first annual results as a public company. Rival UK insurer RSA last week disclosed plans to cut payout by a third. Direct Line has a forecast payout ratio – dividend as a proportion of earnings – of 50-60 per cent.

Esure is likely to pay a similar ratio, said people with knowledge of its planned float. Before its cut, RSA’s was 80 per cent.

Analysts expect Direct Line to pay a final dividend of 7.8p a share.

Paul Geddes, chief executive, is forecast to show Direct Line improved operating profits from operations less than a tenth to £455m in 2012. Restructuring and other “one off” costs totalling about £190m are expected to push pre-tax profits down about a third to £235m.

All parties declined to comment.

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