Higher Aviva offer might be forthcoming if Direct Line engages, says Jefferies

A higher takeover proposal from Aviva might be forthcoming, Jefferies said in a note on Thursday, as it commented on the insurer’s £3.3bn takeover proposal for Direct Line.

Aviva offered 112.5p per share in cash and 0.282 new Aviva share, valuing the group at 250p per share. This is a 59.7% premium to the closing Direct Line share price on 18 November, which was the day before the proposal was submitted.

On Wednesday, Direct Line said it had rejected the proposal on the basis that it was "highly opportunistic" and "substantially undervalued" the group.

Jefferies noted that this was the third bid rejected by Direct Line this year, after it rejected two approaches from Belgium’s Ageas, the first at 233p a share and the second at 237p a share.

The bank, which rates Direct Line at ‘hold’ with a 165p price target, pointed out that the offer from Aviva is 7.2% above Ageas's first offer and 5.4% above their second.

"Given that this is a relatively small uplift from the previous two offers, and the consideration is similarly split between cash and shares, we are unsurprised that the bid was rejected," it said.

"Previously, we suggested that the capital and expense synergies available to an acquirer mean that an offer of at least 270p would be more realistic.

"With this in mind, while we agree with Direct Line’s rejection of the offer, we do believe that a higher offer might be forthcoming if the board considered engaging with Aviva."