Aviva can put its foot down with Direct Line
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add graphic.
By Aimee Donnellan
LONDON, Nov 28 (Reuters Breakingviews) -Aviva AV.L has parked its tank on Direct Line’s DLGD.L lawn. On Wednesday, the 12 billion pound insurer said it had offered 3.2 billion pounds for its domestic rival, but been rebuffed. Boss Amanda Blanc’s scope to go higher implies she may yet appeal directly to her quarry’s shareholders if its board refuses to engage.
Direct Line has become a popular takeover target. Back in February, Belgian insurer Ageas AGES.BR made a 3.1 billion pound offer for the group, a 43% premium to the target’s share price the day before the bid was made. Blanc’s half-cash, half-stock offer values the target at 250 pence a share. Both take their cue from the fact that Direct Line traded above 300 pence a share as recently as early 2022, twice Wednesday’s level – despite being a specialty motor insurer, it goofed by taking too long to raise its prices when the post-pandemic inflationary surge drove up its costs.
The overlap between the two competitors means Direct Line boss Adam Winslow has good reason to hold out for a better offer. Analysts polled by LSEG reckon Direct Line will generate 287 million pounds of net income by 2025. Assume that Aviva can pocket around 130 million pounds of cost synergies, as per Berenberg estimates, equating to a 20% reduction in Direct Line’s administrative expenses. In that scenario Aviva could make a near 13% return on its investment, tangibly above Direct Line’s likely 10% cost of equity.
Given that he has only been in the post for less than a year and inflationary pressures have subsided, Winslow may feel emboldened to demand a per-share offer that starts with a 3, or require a higher proportion of the outlay to be paid in cash rather than shares. Aviva, after all, has an 8 billion pound surplus over its minimum capital requirements, and would like to use a deal to get closer to UK motor insurance market leader Admiral. If it offered 300 pence, Blanc could still muster a 10.6% return.
Before all that, Direct Line needs to engage. With UK motor insurance still a fragmented market, the consolidation logic is on Blanc’s side. If her target’s board declines to give her a view from the driving seat, she’s entitled to go over their heads.
Follow @aimeedonnellan on X
CONTEXT NEWS
British insurer Direct Line on Nov. 27 rejected a takeover offer of 3.28 billion pounds ($4.16 billion) from bigger rival Aviva, saying it “substantially undervalued” the company.
On Nov. 19, Aviva made a 250-pence-per-share offer, which represented a nearly 60% premium to the stock’s close a day earlier.
If the deal had gone through, Direct Line shareholders would have received 112.5 pence in cash and 0.282 new Aviva shares for every Direct Line share held.
Aviva said Direct Line had refused to engage in further discussions.
The chairpersons of both companies have spoken directly to explain why Direct Line was rejecting the offer, a person with knowledge of the matter told Breakingviews.
Direct Line said its board considered Aviva’s proposal with its advisers and concluded that it was “highly opportunistic”.
According to British takeover rules, Aviva has until Dec. 25 to make a firm offer or walk away.
In March, London-based Direct Line also rejected a 239-pence-per-share takeover bid from Belgian rival Ageas, which was 4.6% lower than Aviva’s offer.
Shares in Direct Line were up 37% at 218 pence, while Aviva’s shares were down 2.3% at 478.2 pence, by 0828 GMT on Nov. 28.
Graphic: Direct Line’s shares have been under pressure recently https://reut.rs/497FzJH
Editing by George Hay and Oliver Taslic
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
