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Insurance coverage firm Aviva has contacted traders of bid goal Direct Line in a transfer that would pave the way in which for a hostile takeover of its smaller rival.
The FTSE 100 insurer on Thursday started to achieve out instantly to focus on shareholders, in accordance with individuals conversant in the transfer. The discussions come after Aviva’s 250p per share supply for the 40-year-old insurance coverage group was dismissed by Direct Line’s board as “extremely opportunistic” and “considerably” undervaluing the enterprise.
The transfer was aimed toward stimulating engagement with the Direct Line board, in accordance with a supply conversant in Aviva’s £3.3bn bid proposal.
A mix of Aviva and Direct Line would create an insurance coverage large with greater than a fifth of the motor market and about 15 per cent of the house insurance coverage phase, in accordance with analysis by MKP Advisors. Direct Line’s new boss, Mark Winslow, is a former govt at Aviva and the 2 insurers have giant shareholders in widespread similar to Schroders and Redwheel.
The supply comes after a troublesome couple of years for Direct Line. Former chief govt Penny James stepped down in 2023 shortly after the insurer issued revenue warnings and scrapped its dividend, which has since been restored.
Aviva’s direct attraction to traders got here after the £13bn insurance coverage large mentioned on Wednesday that Direct Line, which is predominantly a supplier of motor cowl, had declined to interact in a non-binding bid method first made on November 19.
Aviva disclosed after market shut on Wednesday that the Direct Line board had on November 26 rejected its cash-and-shares supply, valuing Direct Line at 250p per share.
Aviva described its proposal as “extremely enticing” with the method representing a close to 60 per cent premium to Direct Line’s closing worth of 157.8p on Wednesday.
Direct Line shares closed up 41 per cent on Thursday at 224.4p. Aviva shares closed down 2 per cent at 479.5p.
One high 20 Direct Line investor mentioned: “The supply undervalues the enterprise, particularly as Aviva has motor to allow them to mix them and extract synergies.”
Nevertheless, he added that almost all Direct Line shareholders would most likely tender their shares at 300p.
Many market analysts consider Aviva might want to elevate its bid to win over Direct Line.
“Aviva may very well be persuaded to sweeten the deal to 260p-265p, which can assist fulfill the DLG board,” mentioned Peel Hunt in a notice.
“There may be draw back danger to DLG’s standalone technique and retaining some upside in an Aviva-DLG mixture may very well be a beautiful proposition, which is value exploring in our view.”
Dan Coatsworth, funding analyst at AJ Bell, mentioned Direct Line had “super” model energy within the common insurance coverage market and vital scale, which made it a extremely enticing takeover goal.
“Ought to Aviva have the ability to dig deeper and supply one thing within the area of 275p, Direct Line’s shareholders may really feel that Christmas has come early.”
Beneath the takeover code, Aviva has till 5pm on December 25 to make both a agency supply or announce that it doesn’t intend to a make one.
The Aviva supply was the third takeover bid Direct Line has acquired this 12 months, having rebuffed two approaches from Belgian insurer Ageas.
Aviva’s supply was simply over 7 per cent above Ageas’s first supply and 5.4 per cent above the second.
“Provided that it is a comparatively small uplift from the earlier two gives, and the consideration is equally break up between money and shares, we’re unsurprised that the bid was rejected,” mentioned analysts at Jefferies.
“We’d not be shocked if Aviva make a further supply and thus we reiterate our view that a suggestion of a minimum of 270p is perhaps acceptable.”
Aviva declined to touch upon Thursday’s developments.
Aviva mentioned that it believes a tie-up with Direct Line would speed up its pivot in the direction of turning into a capital-light enterprise and assist develop its private traces market. The insurer believes there are “materials” value and capital synergies.
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Defending its determination to rebuff the Aviva proposal, Direct Line mentioned it had “appreciable conviction” within the capabilities of its newly established management staff, together with Winslow, to show across the enterprise.
“The corporate continues to make early progress in the direction of our monetary targets, and expects to ship enticing development in profitability, capital era and shareholder returns,” mentioned Direct Line in its assertion.
