Direct Line says no to Aviva’s £3.3bn takeover bid
After rejecting a takeover approach earlier this year, the FTSE 250 insurer is now being targeted by a FTSE 100 giant. City writer Graeme Evans has the details.
28th November 2024 13:35
by Graeme Evans from interactive investor
The attempt by Aviva (LSE:AV.) to buy Direct Line Insurance Group (LSE:DLG) in a £3.3 billion takeover swoop marks a further acceleration in its ambition to have a 70% capital-light business mix by 2026.
This figure rose from 47% of operating profit to 55% in 2023, when key investments in support of the strategy included the £460 million deal to acquire AIG’s UK protection business.
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Aviva said last night its move for Direct Line was consistent with its desire to step up growth in its UK businesses and further pivot towards capital-light business lines.
Under Amanda Blanc’s leadership the FTSE 100-listed company has focused on the UK, Ireland and Canada, where the priority is growth in new business volumes that will drive future profits and attractive capital returns to shareholders.
The combination with Direct Line, whose brands include Churchill as well as the roadside recovery business Green Flag, would further strengthen Aviva’s position in UK personal lines and take its market share in UK motor insurance to an estimated 22%.
In its recent third-quarter update, Aviva reported personal lines premium growth of 26% and 13% growth in its Motor policy count. Aviva believes the complementary fit of its business and Direct Line’s would support continued operating momentum.
Aviva’s indicative offer to buy Direct Line valued the FTSE 250-listed insurer at 250p a share, consisting of 112.5p in cash and 138p in Aviva shares.
The proposal was rejected by the Direct Line board, having given the same response in March when Belgium’s Ageas tabled approaches pitched at 231p and then 237p a share.
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It declined to engage further with Aviva, having said the approach substantially undervalued the business and its prospects. Peel Hunt called the offer price reasonable and said that the board may be more interested if Aviva could be persuaded to sweeten the deal to 260p-265p.
The broker believes downside risks to Direct Line’s turnaround strategy of delivering cost savings and switching the brand to price comparison websites have increased.
It notes Direct Line’s healthy capital position, but said recent cycle and regulatory headwinds suggested the recovery could be bumpier than anticipated earlier this summer.
“As such, engaging with Aviva to fully explore their offer in more detail would make sense in our view.” The broker adds that retaining some upside from holding shares in a combined business could be an attractive proposition.
Based on Panmure Liberum forecasts, Aviva trades on 9.6 times 2025 earnings and with a projected dividend yield of 7.8%, while Direct Line is 7.6 times and 8.8% respectively.
At a near 60% premium on last night’s closing price, the offer is 12 times 2025 earnings.
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The City firm called it a good price: “Direct Line shareholders would need to believe that normalised earnings are at least 30% higher in order to reject this offer.
“Given the degree of overlapping business, the expense and capital synergies will be significant, meaning Aviva may have room to offer a slightly higher amount.”
It said before today’s rise in Direct Line shares of 69.5p to 228.2p: “Should shares bounce towards 250p today we believe that shareholders should consider easing their holdings whilst still maintaining an interest in case of a higher bid emerging on later.
“While we cannot rule out a bidding war for Direct Line, we think it unlikely but a higher offer emerging from Aviva remains a distinct possibility.”
Aviva has until 25 December to announce a firm offer or walk away.
Deutsche Bank said: “We value Direct Line at 220p, and even without a takeover bid, like the shares on a 12-month view.
“Meanwhile, we see this as adding confidence to the UK personal lines space, and can see bottom-line synergies for Aviva, even if this could put pressure on its 2025 buyback.”
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