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Insurance company Aviva has contacted investors of bid target Direct Line in a move that could pave the way for a hostile takeover of its smaller rival.
The FTSE 100 insurer on Thursday began to reach out directly to target shareholders, according to people familiar with the move. The discussions come after Aviva’s 250p per share offer for the 40-year-old insurance group was dismissed by Direct Line’s board as “highly opportunistic” and “substantially” undervaluing the business.
The move was aimed at stimulating engagement with the Direct Line board, according to a source familiar with Aviva’s £3.3bn bid proposal.
A combination of Aviva and Direct Line would create an insurance giant with more than a fifth of the motor market and about 15 per cent of the home insurance segment, according to research by MKP Advisors. Direct Line’s new boss, Mark Winslow, is a former executive at Aviva and the two insurers have large shareholders in common such as Schroders and Redwheel.
The offer comes after a difficult couple of years for Direct Line. Former chief executive Penny James stepped down in 2023 shortly after the insurer issued profit warnings and scrapped its dividend, which has since been restored.
Aviva’s direct appeal to investors came after the £13bn insurance giant said on Wednesday that Direct Line, which is predominantly a provider of motor cover, had declined to engage in a non-binding bid approach first made on November 19.
Aviva disclosed after market close on Wednesday that the Direct Line board had on November 26 rejected its cash-and-shares offer, valuing Direct Line at 250p per share.
Aviva described its proposal as “highly attractive” with the approach representing a near 60 per cent premium to Direct Line’s closing price 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 top 20 Direct Line investor said: “The offer undervalues the business, especially as Aviva has motor so they can combine them and extract synergies.”
However, he added that most Direct Line shareholders would probably tender their shares at 300p.
Many market analysts believe Aviva will need to raise its bid to win over Direct Line.
“Aviva could be persuaded to sweeten the deal to 260p-265p, which may help satisfy the DLG board,” said Peel Hunt in a note.
“There is downside risk to DLG’s standalone strategy and retaining some upside in an Aviva-DLG combination could be an attractive proposition, which is worth exploring in our view.”
Dan Coatsworth, investment analyst at AJ Bell, said Direct Line had “tremendous” brand strength in the general insurance market and significant scale, which made it a highly attractive takeover target.
“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.”
Under the takeover code, Aviva has until 5pm on December 25 to make either a firm offer or announce that it does not intend to a make one.
The Aviva offer was the third takeover bid Direct Line has received this year, having rebuffed two approaches from Belgian insurer Ageas.
Aviva’s offer was just over 7 per cent above Ageas’s first offer and 5.4 per cent above the 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,” said analysts at Jefferies.
“We would not be surprised if Aviva make an additional offer and thus we reiterate our view that an offer of at least 270p might be acceptable.”
Aviva declined to comment on Thursday’s developments.
Aviva said that it believes a tie-up with Direct Line would accelerate its pivot towards becoming a capital-light business and help expand its personal lines market. The insurer believes there are “material” cost and capital synergies.
Defending its decision to rebuff the Aviva proposal, Direct Line said it had “considerable conviction” in the capabilities of its newly established leadership team, including Winslow, to turn around the business.
“The company continues to make early progress towards our financial targets, and expects to deliver attractive growth in profitability, capital generation and shareholder returns,” said Direct Line in its statement.
, Aviva goes direct to Direct Line shareholders