Here’s Why RBS Shed Its Insurance Business

Since the British government bailed out the Royal Bank of Scotland (NYSE:RBS) in 2008 by purchasing an 84 percent stake for £45 billion, the bank has made an effort to regain its independent.

As part of its restructuring, the bank is now spinning off its Direct Line insurance business as an independent company, a deal that could earn the company £905 million, or $1.49 billion.

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Direct Line is Britain’s largest car insurer in terms of policyholders, and its annual revenue amounts to £2.64 billion. Shares will be sold at 175 pence apiece, making it London’s largest initial public offering in the last 17 months. The sale will bring the RBS £787 million from the IPO, but after an overallotment option is exercised, the amount will increase to £905 million.

The IPO marks an “important milestone in RBS Group’s restructuring plan,” RBS Finance Director Bruce Van Saun told the Wall Street Journal. The European Commission made the sale of Direct Line a condition when it borrowed £45.2 billion from the British government in 2009. After the IPO, RBS will still own 65.3 percent of Direct Line, but it must sell off the stake completely by the end of 2014.

The spinoff of Direct Line came at a difficult time for IPOs; the euro zone economic crisis has kept many companies on the sidelines. Compared with last year, when 67 IPOs raised almost $19 billion, only 34 transactions have been made on the London Stock Exchange this year. This data, compiled by Dealogic, shows that Direct Line has been the largest initial public offering since Vallares, now Genel Energy, raised $2.1 billion in June 2011 and Glencore raised $10 billion in May 2011.

Beyond the Direct Line deal, RBS has shrunk its balance sheet by £800 million in order to restructure its finances. However, while economic difficulties have hindered the bank’s return to independence, that is not its only problem. The British government, according to the Journal, is unlikely to sell its holding in RBS in the near future because the bank’s shares still trade at half the price the government paid for them. On the New York Stock Exchange, the bank’s shares have traded around $8 during the month of October.

But as RBS Chief Executive Stephen Hester said at a London banking conference at the end of September, “RBS is nearing the point of becoming a recovered bank and well on the way to being a good bank.”

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