Brokers flag RBS share offer for insurer

Within hours of Royal Bank of Scotland filing an intention to float to its Direct Line insurance business, retail stockbrokers including Hargreaves Lansdown and The Share Centre began publicising the share offer to the public.

Some are even offering inducements – such as the chance to win iPads or John Lewis vouchers – to encourage prospective buyers to register their interest.

Clearly, the decision to involve individual investors, in what is set to be the biggest flotation of a UK company in six years, has gone down well with the private-client broking industry.

However, some prospective institutional investors are worried by the development – suspecting that RBS is being inclusive because it thinks there are not enough big funds ready to take part in the initial public offering.

“The retail buyers are there to make up the numbers,” claimed one City fund manager on Friday.

Individuals have been largely excluded from the few IPOs that have got off the ground in London since the financial crisis.

Most notably, individuals were shut out of the London listing of Glencore , although they were included in the commodities trader’s Hong Kong listing.

“Private investors have been deprived of IPOs for years,” says Charlotte Black, corporate affairs director at Brewin Dolphin, one of Britain’s biggest private stockbrokers.

Corporate brokers complain that involving the public can be more time-consuming, complex and expensive than dealing exclusively with institutions. At one adviser to a recent London IPO puts it: “It’s a pain in the arse.”

But people close to the Direct Line process say the group’s portfolio of well-known brands – which also include Churchill and breakdown service Green Flag – make it an obvious candidate for a retail allocation.

“It’s another source of demand,” says John Reizenstein, Direct Line’s finance director. “We think there’ll be interesting appetite there.”

As much as 10 per cent of the company may be sold to the public, according to another person familiar with the situation. “That is very unusual and is an echo of the privatisations in the 1980s,” the person noted.

Others argue that the part-nationalised status of RBS is another factor – suggesting that involving the person in the street is good public relations.

But while several equity analysts believe RBS should be able to raise about £3bn from willing private and institutional investors, some top fund managers are already saying that sum is too high.

“We would be interested in Direct Line for the right price,” says one equity portfolio manager. “I would put that at about £2bn.” Another says: “I think £3bn is toppy. The bankers need to be careful and get the price right. There has been a lot of unhappiness about the way deals have been priced too expensively, which is part of the reason why the IPO market is flat as well as the difficult and volatile environment.”

Experienced private investors may also need more than a prize draw to persuade them that a company focused largely on UK home and motor insurance is an attractive holding.

They are likely to be tempted, however, by the prospect of a chunky dividend – and, on Friday, Direct Line said its initial full-year dividend payment would be equivalent to between 50 per cent and 60 per cent of post-tax earnings.

Prospective investors can therefore expect an annual dividend yield of between 5 per cent and 7 per cent, reckons Barrie Cornes, an analyst at Panmure Gordon.

Not every investor is looking so far ahead, though. As has proved to be the case in a number of previous prospective IPOs, retail investors may find they are denied the chance to buy shares in Direct Line.

Several private equity groups had shown an interest in the insurance business, which RBS is being forced to sell to comply with European state aid rules.

Although people close to the process have downplayed the prospect that these or other parties would make an offer, Mr Cornes believes there is still a good chance that a bid will emerge.

“Given the uncertainty of equity markets, RBS may be better off going for a firm private equity bid for the business now,” he says.