Aviva's Direct Line takeover faces 'material' execution risks, says Jefferies

Aviva's share price has fallen around 3% since the 275p-per-share offer offer for Direct Line was accepted on 6 December, after two earlier offers of 250p and 261p were rejected last month.

"We agree with the market reaction to the deal, because although the financial rewards appear compelling, the execution risks should not be overlooked," Jefferies said.

While the broker acknowledged that the takeover brings "compelling" financial and strategic prospects – from significant operational cost synergies to reducing competition in the market – it highlighted "material execution risk".

Integration of Direct Line's IT systems will be a sticky issue, Jefferies said, because of the company's recent investment programme. "It's not clear which system Aviva ought to decommission. However, as Aviva's book is performing better, it might be safer to write-off Direct Line's investment and move that book to Aviva, even if the systems are older," the broker said.

Meanwhile, Direct Line's strategy since its IPO of "moving down the risk curve" has not been successful in growing earnings sustainably, and Aviva will need to decide whether to "re-risk the book", the broker said.

Regarding Aviva's valuation, Jefferies said: "At <10x 2025 P/E, the stock remains inexpensive to us, and we reiterate our 'buy' recommendation, with a slightly higher price target of 560p [up from 550p previously]."