Buyers position for Direct Line float

Response marks ‘milestone’ for RBS’s insurance arm IPO

The prospect of Royal Bank of Scotland overcoming a moribund environment for stock market launches and floating its insurance arm has strengthened after the part-nationalised lender found buyers for the first tranche of shares.

The market for Direct Line shares became oversubscribed on Wednesday, three days into an investor roadshow, people familiar with the matter said.

Institutional investors have placed orders within the 160p to 195p a share range that RBS set out for the Direct Line last week, they said, adding buyers had been found for an equity stake of as much as a third.

“Engagement is high,” said one person familiar with the offer. “It’s an important milestone.”

However, one prospective investor, at one of the City’s biggest fund managers, cautioned: “It’s only indicative and people can withdraw at a moment’s notice. For an issue to be successful, you want to see it about three times covered at the issue price.

“It might well mean that they’re covered at the bottom of the range. There’s a fairly gloomy view of the quality of the company.”

But another person familiar with the flotation said: “Technically the orders can be withdrawn. It rarely happens.”

The person said the books being covered was a “good indication” for the final price of the initial public offering, which is set to be London’s biggest this year. “There is more than enough demand.”

There is no particular rule for when order books are covered on initial public offerings, although people familiar with the matter said the Direct Line offer had reached the milestone relatively early.

On some offers they are even covered on the first day of the investor roadshow. If books fail to be covered, deals are scrapped.

Direct Line executives – led by Paul Geddes, chief executive – have met prospective institutional investors in London over the past three days, sounding out hedge funds as well as long-only institutional investors.

From Thursday they will turn their attention to prospective buyers in the US and continental Europe.

The flotation was on track to be priced a week today, people familiar with the matter said.

At the mid-point of the price range, Direct Line’s equity would be valued at £2.66bn with an estimated dividend yield of 7.3 per cent.

However, Joy Ferneyhough, analyst at Espirito Santo Investment Bank, said in a report published on Wednesday that Direct Line had a “fair value” of £2.4bn – at the bottom end of the range.

She cautioned that costs arising from a restructuring plan Direct Line has set out to boost returns would constrain returns. “The cost of the clean up is not small.”

Retail stockbrokers have been keen to talk up demand from individual investors. However, people close to the process said it was too early to say how big a stake they would take.

All parties involved in the transaction declined to comment.

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