Exclusive: RBS Risks Row Over Spin-Off



Royal Bank of Scotland (LSE: RBS.L - news) (RBS) risks stoking a row with institutional investors over London's market for public share offerings by appointing nearly a dozen banks to handle the demerger of its general insurance arm.

I have learned that RBS has in recent days appointed Bank of America Merrill Lynch, BNP Paribas (Other OTC: BNPQF.PK - news) , Citi, Commerzbank (Other OTC: CRZBF.PK - news) , HSBC (LSE: HSBA.L - news) , Investec (Frankfurt: A0J32R - news) , KBW (NYSE: KBW - news) and Royal Bank of Canada to work on the listing of Direct Line Group.

The banks will work alongside their more senior colleagues at Goldman Sachs (NYSE: GS - news) , Morgan Stanley (EUREX: DWDF.EX - news) and UBS (NYSEArca: DJCI - news) in arranging the flotation, which could see as much as 40% of Direct Line sold to new investors.

A presentation will be made to sellside analysts at the syndicate’s lead banks on July 25, I’m told, with a roughly-£3bn flotation being pencilled in by RBS executives for the early autumn.

The spin-off of Direct Line Group, which also houses the Churchill and Green Flag brands, was ordered nearly three years ago by the European Commission as part of a remedy for the tens of billions of pounds in state aid received by RBS at the height of the banking crisis.

RBS has to begin the separation of Direct Line Group by the end of 2013, and its expected move to float the company as soon as this September is likely to come as a surprise. That said, the bank will only decide to proceed this autumn if the market for such share offerings is perceived to be open.

The intriguing element of this clutch of bank appointments is that it is one of the aspects of the London IPO market that many leading institutional investors (those who will be expected to buy shares in Direct Line Group) say they dislike.

Last year, I reported on a letter sent by BlackRock (NYSE: BLK - news) , the giant US fund manager, complaining to investment bankers about the “aggressive” and “unrealistic” flotations pitched to it.

One of its principal concerns was “that companies are appointing advisors based on indications of valuation that are unrealistic. In addition, the formation of large syndicates does not appear to benefit the process of price formation. BlackRock is likely to be much less constructive on all IPOs with large syndicates.”

That message about the size of syndicates was reinforced this week at a private meeting arranged by one of the world’s leading investment banks with some of the biggest names in the fund management industry.

So for that reason, it will be interesting to watch whether the likes of BlackRock decide to invest in Direct Line Group when it presses the button on its flotation. And it’s a mystery why RBS has effectively ignored that feedback from fund managers.

It is also notable that neither Deutsche Bank (Xetra: 514000 - news) nor JP Morgan is working on the Direct Line flotation, which sources tell me is because they had agreed with Esure, another insurance group that plans to list its shares in London, that they would not act for any of its rivals.

Direct Line Group declined to comment.