Analyst says probe will cause ‘considerable uncertainty’ to hang over motor market
The Office of Fair Trading’s (OFT’s) decision to refer the motor insurance market to the Competition Commission could lower the valuation of Direct Line Group at its listing, according to analyst Eamonn Flanagan.
The Shore Capital analyst said: “This announcement is also likely to ‘put a spanner in the works’ surrounding the Direct Line Group IPO.
“In H1 2012, ancillary income (including instalment income which may also be under threat from such an investigation) amounted to £99m.
“Assuming a profit margin of say 70%, this would imply that such income accounted for over 30% of Direct Line Group’s H1 2012 operating profits. To us, this OFT referral puts a huge question mark over such earnings and the valuation that should be attached to them.
“As a consequence, we struggle to justify a valuation in our previous range of between £3bn to £3.2bn … more realistically, we may see Direct Line Group struggling to achieve a valuation of more than £2.7bn.”
Flanagan said the probe raised three issues for the industry: costs involved, time and effort needed by companies to work on it and the real prospect of disclosure of commercially sensitive information.
He said: “There are, in our view, unlikely to be any winners emerging from this unsavoury episode over the short to medium term, with considerable uncertainty likely to overhang the industry for up to two years.”
Commenting on the OFT referral, a Direct Line Group spokesman said: “Direct Line Group welcomes the Office of Fair Trading’s decision to refer the motor insurance market to the Competition Commission.
“Over the past months we have co-operated fully with the OFT and welcome working with the Competition Commission going forward.”
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