Direct Line sale offers slim pickings for advisors

Investment banks working on British insurer Direct Line's share listing have agreed to lower than usual fees, and retail brokers are offering iPads to lure buyers, as the industry scraps over a rare deal in a slow market.
Royal Bank of Scotland, the British bank selling Direct Line, will likely pay about 2.5 percent of sale proceeds to banks handling the deal, including an extra fee if the deal goes well, three people familiar with the matter said.
That would be below the average 3 percent for a European initial public offering (IPO) since 2000, and reflect investment banks' eagerness to take the business amid a lengthy drought of major flotations blamed on volatile financial markets.
Most analysts value Direct Line, Britain's biggest motor insurer, at 2.5-3.5 billion pounds ($4.1-$5.7 billion), and the business is expected to be priced towards the low end.
The business has a tangible net asset value of 2.3 billion pounds, and a top 10 investor in RBS said while it should trade at a premium to that, RBS would not be too aggressive.
"The initial flotation price is less important than how it will trade in the aftermarket. It is more important to lay a solid foundation, achieving a positive share price move on the flotation and subsequent rerating through operational delivery, than it is to get a good price day one," the RBS investor said.
If RBS sells 25 percent of the business, and investors value it at the bottom of the range, the 12 banks advising on the sale would collect 16 million pounds between them.
Banks have an added incentive to trim their fees because they hope to win follow-on business from RBS, expected to offload a further two tranches of Direct Line shares by end-2014 as it seeks to sell its entire holding.
There is also the prospect of winning mandates from the government which aims, over time, to sell its 82 percent holding in RBS, or from Direct Line itself.
Banks advisory fees are typically lower in the case of big IPOs, or when the seller is the government, under political pressure not to hand over large sums of taxpayers' money to investment banks.