Direct Line rejects £3.3bn takeover proposal from Aviva, shares surge

In a press release after the close on Wednesday, the insurer said Aviva had 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.

Direct Line dismissed the offer as "highly opportunistic", saying that it "substantially undervalued the company".

"The board has considerable conviction in the capabilities of our newly established leadership team and stands firmly behind their delivery of our strategy," it said. "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."

The proposal was unanimously rejected by the board of Direct Line.

In a separate statement, Aviva said that Direct Line had "declined to engage further" since rejecting the offer.

It said: "Aviva believes that an acquisition of Direct Line would be consistent with its strategy to accelerate growth in its UK businesses and further pivot the group towards capital-light business lines.

"The acquisition would expand Aviva's presence in the attractive UK Personal Lines market, building on its existing strength, and creating a more efficient platform from which to serve existing and new customers. In addition, the acquisition would allow Direct Line customers to benefit from Aviva's breadth, scale and financial strength."

Aviva said a deal would deliver "attractive" returns for both its and Direct Line shareholders, including unlocking value that is inaccessible to Direct Line standalone.

"Aviva believes that the acquisition would deliver material cost and capital synergies, incremental to Direct Line's existing cost savings programme," it added.

At 0905 GMT, Direct Line shares were up 40% at 222.40p.

In March, Direct Line said it was confident in its standalone prospects after Belgium’s Ageas announced it would not be making an offer for the insurer following two failed attempts at engaging with the board.

On 28 February, Direct Line said it had rejected a £3.1bn offer from Ageas. This comprised 100p in cash and one new Ageas share for every 25.24 Direct Line shares, and implied a value of 233p per share.

On 13 March, the insurer said it had received and rejected a second takeover approach received on 9 March, at 120p a share in cash and one new Ageas share for every 28.41 Direct Line shares. It had an implied value of 237p a share.

Jefferies said in a research note on Thursday that a higher offer might be forthcoming.

It noted that Aviva’s proposal 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."

Jefferies has a 'hold' rating and 165p price target on the stock.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said Direct Line was "playing hard to get, again".

"It's not a clean offer; the 250p would be split half as cash and half as Aviva shares, which always makes things a little more complicated," he said.

"Direct Line is no stranger to takeover offers, having rejected multiple attempts from Belgian insurer Ageas earlier in the year. There's a case to be made that Aviva is a better suiter, given it already shares markets with Direct Line in the UK, but it'll need to up its game - and its offer - if it wants Direct Line to take the proposal seriously."

Dan Coatsworth, investment analyst at AJ Bell, questioned why it took Aviva so long to move on Direct Line.

"Aviva has been basking in the glory of asset disposals for some time, yet the excitement from large shareholder distributions has now faded away. The fundamental problem around how Aviva will accelerate growth has returned to the forefront, and low and beyond it has dusted off the M&A playbook," he said.

"In this situation, buying a long-standing rival is the obvious manoeuvre and it has helped that Direct Line is still on its knees after a disastrous few years. That’s depressed its valuation and allowed for Aviva to step in while the shares are weak. Direct Line has already fought off bid interest from Ageas, so its defence strategy is still fresh to use against Aviva."

He said that even though Direct Line's board has rejected the approach from Aviva, its shareholders might welcome a bid, particularly if the takeout price helps to make up for the big losses from the past two years or so.

Coatsworth said the proposal was a "decent" bid premium and "some Direct Line investors might be happy at that price".

"Should Aviva be able to dig deeper and offer something in the region of 275p, Direct Line’s shareholders might feel that Christmas has come early," he said.

"Direct Line has tremendous brand strength in the general insurance market and significant scale, which makes it a highly attractive takeover target. While there are a few issues to iron out, longer-term it’s easy to see why a rival would want to buy the company."