Ageas would need to offer 270p to 300p a share for Direct Line, says Jefferies

Direct Line confirmed on Wednesday that it had rejected a £3.1bn takeover approach from Ageas, saying it "significantly" undervalued the group.

The terms of the "highly conditional, non-binding indicative proposal" comprised 100p in cash and one new Ageas share for every 25.24 Direct Line shares. As at closing on Tuesday, this implied a value of 233p per share.

Jefferies said the 270p to 300p a share range would be more in line with recent M&A valuations in the sector.

"We believe such a deal could be a good strategic fit and would be likely to deliver material synergies, whilst not being problematic from a regulatory point of view," the bank said.

Based on its forecasts, Jefferies said a 233p share price implies a 10.6x 2025F price-to-earnings multiple, which would be a discount to recent UK personal lines insurance deals. It noted that Bain acquired Esure in 2018 at a circa 12x one-year forward P/E multiple, while Sampo bought Hastings at around 14x.

"Thus, a proposal would more likely be accepted if the valuation were greater than 270p, implying a 12x 2025F P/E multiple," it said.

Mulling the prospects of a potential higher offer from Ageas, Jefferies said a 270p to 300p price would imply that the Belgian firm would need to raise a further £0.5bn-£0.9bn in cash.

"This would likely need to be largely funded with new debt, since Ageas guided to having €350m of cash available for investments in 2024 in its results presentation this morning," it said. "We note that Ageas's current financial leverage is 18.3%, so there is sufficient capacity to raise further debt, in our view."

Jefferies rates Direct Line at ‘buy’ with a 210p price target.