Direct Line: An Indirect Market Debut

Shares in the insurance company Direct Line are now trading in London, but the official IPO is next Tuesday

Alanna Petroff 11 October, 2012 | 2:42PM
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Shares in the insurance company Direct Line (DLG) began trading in London on Thursday, but they are currently in a phase called “conditional dealing”, which means that trades cannot be settled and finalised until the company has its official initial public offering (IPO) on Tuesday, 16 October.

Today marks the start of three trading days of conditional dealing for Direct Line, which is a period of time that helps with price formation in the market, says a London Stock Exchange spokesperson. Essentially, during this time, investors can trade shares in the company, but the trade settlements are deferred until the Tuesday IPO, he said. That is when the shares are officially admitted onto the London Stock Exchange.

“It’s a slightly arcane thing,” said Hargreaves Lansdown’s head of equities, Richard Hunter, referring to the market practice of conditional dealing. “For all intents and purposes, the stock is trading today… I can’t remember a time when conditional trading didn’t turn into unconditional trading.”

“It’s standard practice, certainly for stocks listed on the London Stock Exchange,” said Giles Watts, head of equities at City Index.

One of the key differences between conditional and unconditional dealing is that people cannot short a stock during conditional dealing, said Watts. Shorting generally only happens once unconditional, normal dealing kicks in and trades are officially settled, he said.

Currently, investors will be able to buy and sell Direct Line shares through their brokers ahead of the official IPO, though they might have trouble finding pricing information about the company’s shares by doing an online search.

The insurance company’s shares were originally priced at 175p each, valuing the company at £2.6 billion. The share price rose once trading began.

“Those who jumped in at the launch price of 175p are already seeing a paper profit … [This is] a solid start for those who took the IPO plunge,” said Will Hedden, a trader at IG.

Direct Line is a spin-off from the Royal Bank of Scotland (RBS), which is working to off-load the insurance group to satisfy government bailout conditions from the 2008 financial crisis. The offering raised £787 million for RBS, making this the largest UK company fundraising on the London Stock Exchange this year. RBS is working to sell off the rest of the insurance group in the future.

"We are very pleased to have successfully completed the Direct Line Group IPO as the first phase in our EU mandated disposal. This is another important milestone in RBS Group's restructuring plan,” said RBS Group’s finance director, Bruce Van Saun.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.