By Direct Line Insurance Group’s shares jumped by as much as 38% on Thursday on the back of news that Aviva has made a £4.1 billion takeover bid for it that Direct Line has rejected, calling it “opportunistic” and undervaluing the company.
The share price surge made Direct Line the top riser on the FTSE 250 index.
Meanwhile, Aviva shares fell by 2.7%, placing it among the biggest losers on the FTSE 100.
Aviva’s bid, worth 250p per Direct Line share, comprised 112.5p in cash and 0.282 new Aviva shares, based on its 18 November share price of 488p.
While the offer represented a 60% premium over Direct Line’s share price on 18 November, the car insurer’s board dismissed it as undervaluing the company, especially as it undergoes a turnaround under a new leadership team.
What do analysts think of the bid?
Analysts from Jefferies noted that the potential capital and expense synergies for an acquirer justify an offer of at least 270p, making it a more realistic valuation.
While they agreed with Direct Line’s rejection of the current offer, they said there was a possibility that a higher bid could emerge if the board chose to engage in discussions with Aviva, Jefferies’
However, most other analysts disagreed with Direct Line’s stance but said a sweetening of the deal would go a long way.
Panmure Gordon analyst Abid Hussain described the bid as attractive for shareholders, noting that it offered a significant premium to Direct Line’s market value before the announcement.
“We believe that an offer at around 250p per share or slightly above is good for Direct Line shareholders. The offer represents a 60% premium to Direct Line’s shares on 18 Nov. Or 57.5% premium to close yesterday,” Hussain said.
“No cost savings/ synergies have been disclosed but we assume at least 10% as being a likely figure,” he added.
Hussain suggested that if DLG shares approached the indicative bid price of 250p, shareholders might consider selling some holdings while retaining an interest in the possibility of a higher bid.
He downplayed the likelihood of a bidding war but maintained that “a higher offer emerging from Aviva remains a distinct possibility.”
Andreas Van Embden at Peel Hunt described the current bid as “reasonable,” but said Aviva “could be persuaded to sweeten the deal” to around 260-265p per share in an adjustment that “may help satisfy the DLG board.”
“There is downside risk to DLG’s standalone strategy and retaining some upside in an Aviva-DLG combination could be an attractive proposition, which is worth exploring in our view,” he said.
Matt Britzman, senior equity analyst at Hargreaves Lansdown pointed out that since the proposed deal is not a straightforward one the 250p comprises half cash and half Aviva shares, it has added a layer of complexity.
He said that while Direct Line has also dismissed multiple bids from Belgian insurer Ageas earlier this year, Aviva might be better positioned as a potential partner due to its shared presence in the UK market.
He also, however, said that the insurer would need to increase its offer and refine its proposal to gain Direct Line’s serious consideration.
Terms of the proposal and Direct Line’s turnaround plan
Aviva has highlighted potential benefits of the deal, including “material cost and capital synergies” beyond Direct Line’s £100 million savings plan.
Aviva believes acquiring Direct Line would accelerate its UK business growth and create significant value for both companies’ shareholders.
“The proposed acquisition would unlock value inaccessible to Direct Line as a standalone entity,” Aviva said in a statement.
While the offer represented a 60% premium over Direct Line’s share price on 18 November, the car insurer’s board dismissed it as undervaluing the company, especially as it undergoes a turnaround under a new leadership team.
Direct Line’s board said it “has considerable conviction in the capabilities of our newly established leadership team and stands firmly behind their delivery of our strategy”.
“Under this strategy, the company continues to make early progress towards our financial targets, and expects to deliver attractive growth in profitability, capital generation and shareholder returns,” it said.
The insurer also aims to achieve £100 million in cost savings by 2025 but Aviva has stated a deal, if goes through, will lead to cost synergies in excess of the £100 million.
Direct Line, the UK’s first car insurer to sell policies directly to customers, has faced challenges in recent years.
The company has issued multiple profit warnings, and its performance has been strained by rising post-pandemic claims costs.
CEO Adam Winslow, appointed this year and a former senior executive at Aviva, has spearheaded a strategic shift focusing on motor, home, commercial, and car breakdown insurance.
What the potential deal means for Aviva
This is the second takeover attempt for Direct Line in 2024, following its rejection of a £3.1 billion offer from Belgian insurer Ageas in February.
The renewed interest underscores the competitive dynamics in the UK insurance sector, as major players seek to consolidate and expand market share.
Direct Line has also been making tough decisions as part of its restructuring.
This month, the company announced plans to cut 550 jobs, representing 6% of its workforce, to streamline operations and improve profitability.
Deutsche Bank’s Rhea Shah took a more optimistic view of the proposed deal, noting its broader implications for the insurance sector.
“We see this as adding confidence to the UK personal lines space, and can see bottom-line synergies for Aviva,” she said.
However, Shah warned that these benefits could come at the expense of Aviva’s 2025 share buyback plans.
However, even if Direct Line accepts the deal, it will face regulatory scrutiny.
According to Hussain, the combined motor insurance market share would remain below industry leader Admiral’s, but the merged entity could dominate the home insurance sector, where Aviva currently holds a 12% market share.
Under UK takeover rules, Aviva has until December 25 to submit a firm offer or withdraw.
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