State-backed Royal Bank of Scotland (RBS) confirmed it plans to push ahead with a flotation of its Direct Line insurance division in what could be the biggest listing on the London Stock Exchange for more than a year.
RBS, which is majority-owned by the government after a bailout during the 2008 financial crisis, was told to sell Britain's biggest motor insurer by European Union regulators as a condition for taking state aid.
"We believe it has a strong future as a standalone insurance group, continuing to serve its customers well while delivering attractive returns to investors," RBS Finance Director Bruce Van Saun said in a statement on Friday.
Analysts have said that the initial public offering (IPO) could value Direct Line at more than 3 billion pounds ($4.8 billion), but the business may struggle to match that valuation in tough market conditions that have already scuppered a planned flotation by Germany's third-biggest insurer Talanx.
Talanx abandoned its Frankfurt IPO on Wednesday, saying investors were demanding too big a discount on the company's valuation relative to what its investment banking advisers had foreseen.
If RBS were to encounter a similar experience to Talanx, it would have the option of re-examining a straight sale or asking Brussels for an extension to the deadline. Under the EU directive, it must have sold more than 50 percent of its shares by the end of 2013 and its entire holding a year later.
RBS will market the offer to potential investors over the next few weeks and will be under political pressure to secure a good deal. UK taxpayers are sitting on a loss of more than 20 billion pounds after Britain pumped 45 billion pounds into the bank to secure its future.
With investors wary of unpredictable markets and companies reluctant to sell large chunks of their stock cheaply, Europe has seen little in the way of IPO activity over the past year.
Regulatory uncertainty provides a further challenge for Direct Line's flotation. Britain's Office of Fair Trading (OFT) will decide next month whether to call for a full anti-trust probe of the motor insurance market following concerns that a lack of competition is pushing up premiums for customers.
RBS has stuck to its plan to float the business after interest from private equity firms failed to lead to a compelling offer. Bain Capital and Blackstone had considered an offer for Direct Line, while Apax Partners, BC Partners and KKR also mulled bidding, Reuters reported in July.
BC Partners and CVC both came close to buying Direct Line more than three years ago, when RBS hoped to sell it for about 6 billion pounds, although the sale was pulled shortly after the lender's bailout.
Van Saun said last month RBS was planning a three-tranche sale - one this year, one next year and a final sale in 2014. RBS said on Friday it planned to sell at least 25 percent of its shares in the first tranche, in line with the minimum requirement under stock exchange rules.
Direct Line, which opened for business in 1985 with just one call centre in Croydon, south London, now has more than 10,000 employees selling insurance products to more than 10 million customers across Britain and Europe.
Aside from Direct Line, its brands include Churchill, Privilege and the Green Flag roadside recovery service.
Earlier this month, Direct Line stepped up a charm offensive with investors saying it expected to become more profitable after the flotation. It said it would cut almost 900 jobs as part of plans to deliver 100 million pounds in cost savings by the end of 2014.
Goldman Sachs and Morgan Stanley are joint global co-ordinators, sponsors and bookrunners for the IPO, with UBS also a joint bookrunner. ($1 = 0.6226 British pounds)
(Editing by David Goodman and David Holmes)