Direct Line IPO: What investors need to know

4th September 2012

But whether that phone will ring for Direct Line in its expected stock market flotation in October is a matter of debate. The valuation call – according to analysts – could be anything from a Footsie-entering £4bn plus to a disappointing under £3bn tag.

Whatever the eventual price ticket, it will be the highest value float for a UK company since Standard Life more than six years ago. It will test the UK IPO appetite for consumer facing groups – one that has been jaded since the Ocado float in July 2010.  Originally slated for 240p, it got away at 180p – the online grocery delivery service is currently trading at 60p.

But Ocado had a business model that had never produced a profit and was dependent on Waitrose customers, many of whom have since migrated to the supermarket's own online site.

Long record with multi-brand strategy

Direct Line, by contrast, has a long record in a competitive consumer industry, with quoted rivals including Admiral and Hiscox.  The firm is run from Bromley, Kent, has operations in the UK, Germany and Italy, and works through a multi-brand strategy including Direct Line, Churchill and Privilege as well as "white label" cover for a number of UK names including Prudential, RBS/NatWest, Nationwide, and Sainsbury's.  It provides breakdown cover through Green Flag. The Direct Line brand, but not the others, refuses to sell through comparison sites. Consumers are unclear of the difference between Direct Line and Churchill.

Direct Line owner RBS has been forced by European regulators to sell the insurer by 2014 as part of the taxpayer bailout of the bank.  Earlier this week it said the long-planned separation was "substantially complete".

But RBS and its taxpayer shareholders should not expect too much.  Direct Line might have been worth as much as £7bn before the financial meltdown.  And substantiated sightings of private equity firms  – including Apax Partners, Bain Capital, Blackstone Group, and KKR – in talks with RBS earlier this year came to nothing.  At that time, the bank is said to have asked in excess of £4bn for the insurer – the buyout groups baulked at that.

Comparison with rivals inevitable

The closest rivals are Admiral and Hiscox, both personal lines insurers with a large exposure to consumers.  Admiral trades on price/earnings ratio of 13.4 times – its share price has recovered to levels of a year ago following a substantial dip late last year following a profits reversal. But Admiral has not attracted positive support  recently. It was under heavy selling pressure on Monday  after Credit Suisse downgraded its rating on the shares, saying that "there isn't much upside left in the stock."

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