Direct Line IPO

Monday, Oct 01 2012 by
1

The indicated range for the Direct Line float is between 160-195p, and is thought by many to undervalue the business by about £600m, especially in comparison to its listed peers - RSA Insurance and Admiral. Given that insurance is a necessary evil for all of us, and Direct Line built the brand and name on discounting and undercutting its competitors on price, this would seem to give the float a better chance than average.

Added to this, it would seem that HM Govt are keen to ensure this float is a success as it will have a very positive effect on the markets, bringing in new investors and money, boosting investor confidence and the economy in general.

The fact the Competition Commission enquiry was introduced just as Direct Line / RBS considered upping the float price smacks of Govt intervention - they want to keep the offer price down to ensure the float gets away and make a profit for all who take part. Frankly, having insured my daughter to drive our car, I would welcome the Competition Commission enquiry, but I also welcome the impact it has had on the indicated price range. For info Traders Own Stockbroking (£6 per trade flat fee) are participating in the offering. Link here:http://www.tradersown.co.uk/sharedealing_guide::traders_own_stockbroking.html


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The Royal Bank of Scotland Group plc (RBS) is a holding company of a global banking and financial services group. The Company operates in the United Kingdom, the United States and internationally through its two principal subsidiaries: The Royal Bank of Scotland plc (the Royal Bank) and National Westminster Bank Plc (NatWest). Both the Royal Bank and NatWest are clearing banks. In the United States, the Company’s subsidiary Citizens Financial Group, Inc. (Citizens) is a commercial banking organization. The Company’s business segment include UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank, US Retail & Commercial, Global Banking & Markets (GBM), RBS Insurance, Central items, Non-Core Division and Business Services. In May 2012, The Paragon Group of Companies PLC announced the acquisition of further unsecured consumer loans, through its Idem Capital Securities subsidiary, from the Company. more »

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20 Posts on this Thread show/hide all

marben100 1st Oct '12 1 of 20
1

See also recent ShareSoc blog post: http://www.sharesoc.org/blog.html

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emptyend 1st Oct '12 2 of 20
6

The indicated range for the Direct Line float is between 160-195p, and is thought by many to undervalue the business by about £600m, especially in comparison to its listed peers - RSA Insurance and Admiral.

mmmmm......I'm not sure about that comparison.

RSA (who own More Than) and Admiral have both embraced comparison websites and tailored their business models around them. In contrast, Direct Line (and a small number of others) have tried to make a virtue out of the fact that their rates do not appear on comparion websites. I think that is increasingly an unsustainable approach....

....because there must be loads of people like me who have previously been insured with Direct Line and eventually switched away when their premiums went up for no good reason (in my case that was over 10 years ago now) AND who also hate spending 20 minutes + on the phone going through the same dull details of the insurance required only to discover at the end of the call that the insurer is uncompetitive and it was a waste of time trying. So I never bother to go through the rigamarole of asking them.

Thus I think that Admiral and RSA (probably) are correctly priced at a premium.

Whilst writing this comment, an email has popped into my inbox from Hargreaves Lansdowne promoting this share offer and inviting subscription via themselves. This is accompanied by an offer of a  Free independent, authoritative Insight Report - written by Richard Hunter, our Head of Equities, our free report provides background information, detailed analysis and expert commentary to help you decide whether this share offer is right for you or not.

..........I'm intrigued at the idea that someone who is clearly strongly promoting investment in Direct Line (and presumably getting paid by results) can put out a report from one of their employees and trumpet that it is "independent" and "authoritative"..... ;-/

I haven't read his report - I wonder what it recommends? Would he be claiming that it is £600mn too cheap, I wonder?  ;-)

I can't say that I find Direct Line attractive. I suspect the float will do OK, but would worry about that "Facebook effect" (large numbers of retail punters pulled in by brand familiarity and expecting a first day "pop" because it is "too cheap").

ee

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Alan Green 1st Oct '12 3 of 20

You could well be right there emptyend. Thing is if enough PI's do get in, stag the float and make money that too will be a good thing for the markets, trading volumes etc etc. But you're right, there's no way HL can be free and independent if their float promo is accompanied by 'a free independent, authoritative insight report'. You may have noticed I posted a link to Traders Own Stockbroking re the IPO where I have an interest. We are promoting the float, but we also have a rock bottom £6 per trade flat fee dealing serviceand have no vested interest one way or another other than obviously dealing volumes.

FYI Traders Own is a PLC, and offers free shares (equity units) for all who sign up, introduce friends / colleagues and for every trade placed. Info on that here


I have no beef one way or another, but I do believe HM Govt have conveniently intervened with the Competition Commission enquiry into insurance, so disconted as it will no doubt be, it does stand a good chance of getting away!

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MadDutch 1st Oct '12 4 of 20
1

What's the dividend?

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slartybartfast 1st Oct '12 5 of 20
1

"Proforma full year dividend pay-out ratio for the 2012 financial year
expected to be between 50-60% of any consolidated post-tax profit
from the Group's ongoing business"

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MadDutch 3rd Oct '12 6 of 20

Thanks. A dividend cover around 1.8 is good. I will consider it for a buy.

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mylesdavies 3rd Oct '12 7 of 20
2

Moral Hazard. Don't listen to anyone who has a vested interest be it dealing volumes or non-independant independant reports. Do your own research.

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Jackalope 5th Oct '12 8 of 20
2

Having given this some thought I just cancelled my orders: quite a good article by Anthony Hilton on the float here: http://www.standard.co.uk/business/markets/anthony-hilton-best-to-be-wary-of-direct-lines-float-8197461.html

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emptyend 5th Oct '12 9 of 20

Yes - good article. Amongst other things he is pointing to the risks of the apparent focus on retail that I highlighted above. There is always a risk of retail overpaying for businesses that are familiar (though I doubt anyone is deluded enough to think that the upside potential of Direct Line is anywhere near as big as investors seem to have assumed with Facebook - so I'd think that any short term losses would be limited to 10% or so, even if it is over-priced).

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Edward Croft 5th Oct '12 10 of 20
4

In reply to Jackalope, post #8

I'm not making any predictions on the Direct Line float... but I would say that in general big floats have been an absolute disaster for investors in recent years.

I wrote an article on exactly this topic just before the Facebook float (no surprises what's happened there to date), but at the point of writing of the article the returns on recent big UK IPOs were as follows : Betfair (LON:BET) –52%, Ocado (LON:OCDO) –36%, Glencore International (LON:GLEN) –33%, Supergroup (LON:SGP) –41% and African Barrick Gold (LON:ABG) –39%. Hmmm spot the trend anyone?

http://www.stockopedia.com/content/why-big-ipos-are-the-ultimate-middle-finger-to-investors-66104/

Blog: Follow @edcroft on Twitter
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kenobi 5th Oct '12 11 of 20
1

Edward, I agree generally these things are a disaster, especially as they've usually been hyped and people over pay because of name recognition, (or sometimes Like Debenhams they're sold on above value by companies that have bought them tarted up a bit and sold on).

The difference here, is that we're buying this asset from a bank 80% owned by the government, a conservative government for that matter. Would they like this to be a failure ? I suspect not, there might be all kinds of other things they'd like to sell off in the future and that'll be helped by this working out well.

Having said all that, my inital thoughts about direct line are, does it make much money ? surely this is a cut throat market for a commodity product ? No doubt everything possible has been done to put it in the best light, but will it be sustainable ? (also the other issue of the share overhang would worry me longer term. I would predict it will rise modestly to start with , say 10% on it's first day, may well drop off longer term. Not sure I'm minded to actually buy myself, but I might be tempted at a little nibble,

cheers K

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Alan Green 9th Oct '12 12 of 20

Some interesting and insightful comments here. Whether you take up the float or not, FYI applications have to be in by 5pm today.

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djpreston 10th Oct '12 13 of 20
5

Well, now that applications have closed I can feel free to make some comment.

By the way, Intermediaries shoudl be notified of pricing and allocations around 9p, tonight with some brokers hearing around 5am tomorrow.

Im normally very very wary of IPOs for the reasons that Ed has highlighted above. Having said this I view this differently (in some way ssimilar to Kenobi):

1. This is a forced sale of part of the RBS interest with more to come in due course. This shoudl means that they want a healthy aftermarket for when they come to offload more shares later.
2. Critically, for me, DIrect Line has been somewhat frustrated by the banking culture - now it is separate, a more innovative approach is possible, especially now the directors have their own targets and rewards linked to a beast that they solely run.
3. Combined ratio at DL is far worse than rivals such as Admiral so plenty of scope for cost cutting and efficiency gains.
4. It is, due to the size, gogint o be well supported by the trackers, ETF buyers and index hugging funds.

Okay, this isnt going to be a huge instant winner but to me it looks like a good, somewhat tired (operationally) brand that will benefit from more independence, being priced on a good to go basis with a high dividend yield (which will also attract the equity income funds who woud want another source of income generation).

As you can guess, we put in an order for a lot of stock - what we get will be interesting to see.

Cheers

D

Fund Management: European Wealth
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djpreston 10th Oct '12 14 of 20

Rumour has it that pricing will be in the range of 170-177.5p.

Fund Management: European Wealth
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Asagi 10th Oct '12 15 of 20

FT reports 170-177.5p as fact, not rumour.

"RBS told investors on Tuesday that it planned to price the IPO at between 170p and 177.5p a share"

http://www.ft.com/cms/s/0/7ca2106c-1219-11e2-bbfd-00144feabdc0.html#axzz28v9A5lgS

well, the plans are being reported as a fact anyway!

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djpreston 11th Oct '12 16 of 20

Well, it priced at 175p, exactly the price I was assuming.

Fund Management: European Wealth
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emptyend 11th Oct '12 17 of 20
3

In reply to djpreston, post #13

Hi djp,

Water under the bridge at this point, but I'm just going to comment on a couple of your notes:

1. This is a forced sale of part of the RBS interest with more to come in due course. This shoudl means that they want a healthy aftermarket for when they come to offload more shares later.
2. Critically, for me, DIrect Line has been somewhat frustrated by the banking culture - now it is separate, a more innovative approach is possible, especially now the directors have their own targets and rewards linked to a beast that they solely run.
3. Combined ratio at DL is far worse than rivals such as Admiral so plenty of scope for cost cutting and efficiency gains.
4. It is, due to the size, gogint o be well supported by the trackers, ETF buyers and index hugging funds.

The first point is clearly a good one - and Asagi made the same point to me offboard several days ago after my comment above. They will clearly not price with the intention of "stuffing" the market. Point 4 is also clearly going to be right.

I'm not sure about items 2 and 3 though. Peter Wood (who founded Direct Line) always enjoyed a large amount of operational autonomy, even in the decade when he ran it under RBS ownership. I'd really be quite surprised if "the banking culture" had infiltrated the insurance businesses since he left, to any material degree. I've always had the impression that  being owned by a bank wasn't a material constraint (and indeed in the early days it provided great swathes of the customer base).

Regarding item 3, I wonder whether that difference is more to do with the differences in the business model and the fact that Direct Line is set up for channels that have been overtaken by the development of internet distribution? Every clearing bank I worked for was ALWAYS obsessing over cost ratios - and, as you know, when RBS took over NatWest the gains they made were almost wholly due to cost cutting (in that case they also had opportunities to eliminate duplications). I can't believe that Direct Line would have been allowed to have an excessive cost base unless it was something that they the division itself had insisted was necessary.

Anyway - we'll soon see the acid test of the market performance..... I think it will do OK, as I posted above, in the immediate aftermarket - but my concerns would remain for the medium term.

cheers

ee

 

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kenobi 11th Oct '12 18 of 20
1

My hunch is that the government will want scenes reminiscent of the thatcher privatisations, where people where queuing up to deposit their applications, and applying under different familly members names, and making money, causing a good feeling about the economy in general, never mind if it's funded by selling the company silver.

Personally I think the government should have fought rbs's corner more aggressively, ok, they got state aid, what exactly has happened to the shareholders ? 95% loss ? so what they deserve is forced asset sales ?
and lloyds, again a 95% wipe out, they helped the government out by taking on halifax and preventing the government having to take over another bank, and their reward, (after the chairman saying, we're taking a chance here on a deal that we'd never normally get permission for ), their reward, to have to sell off 100's of branches, thus reducing any possible long term benefit. It is totally mad and unfair on the poor sods who had money in the banks either directly or through pension funds, how the government could stand by and let europe do this to the banks I don't understand. We'll see what punishment the european banks get after they take money directly from the ecb, rather than from governments. (I'll wager now, non whatsoever),

Cheers K

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Alan Green 11th Oct '12 19 of 20

Well it's been a good first day for Direct Line (DLG) shares are at 188p on the grey market, it'll be interesting to see how they fare on the first day of unconditional trading next week

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Alan Green 25th Oct '12 20 of 20
1

The float thankfully has been a success for PI's and institutions alike, and the stock seems to have withstood the slings and arrows of the first few weeks in the market too. Currently at 192p, I still hold and will continue to.

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