Direct Line has unanimously rejected Aviva’s £3.28 billion ($4.16 billion) 100% acquisition proposal, stating that it does not adequately reflect the firm’s standalone value, describing the offer as “highly opportunistic” and not in line with its long-term potential.
In a recent announcement, Aviva confirmed that it made a 250-pence-per-share offer on the 19th of November, 2024, reportedly representing a premium of 59.7% to the closing Direct Line share price on the 18th of November, 2024.
As per Aviva, this proposal was “highly attractive” and would be consistent with its strategy to accelerate growth in its UK businesses and further pivot the company towards capital-light business lines.
“Aviva believes that an acquisition of Direct Line would deliver attractive returns for both Aviva 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,” Aviva added.
However, after considering the proposed acquisition with its advisers, Direct Line’s Board concluded that the offer was “highly opportunistic” and “substantially undervalued” the firm.
Direct Line said in its own statement, “The Board has considerable conviction in the capabilities of our newly established leadership team and stands firmly behind their delivery of our strategy.
“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.
“As such, the Board considered the Proposal to not reflect the standalone value that can be delivered by the Company, and hence considered the possible offer highly opportunistic in nature. Accordingly, the Board unanimously rejected the Proposal on 26 November 2024.”
Direct Line concluded its statement by noting that Aviva is required, by not later than 5 p.m. on 25 December 2024, to either announce a firm intention to make an offer per British takeover rules or announce that it does not intend to make an offer.
In response to this news, analysts from the UK investment bank Peel Hunt responded, suggesting that the offer was “reasonable”, and captures Direct Line’s excess capital and discounts a turnaround in the firm’s profitability in the next two years.
Peel Hunt’s analysts continued, “We believe Direct Line’s current share price does not discount the potential recovery of the insurer’s profitability by the end of 2026.
“However, despite Direct Line’s healthy capital position, there are some recent cycle and regulatory headwinds which suggest the recovery could be bumpier than anticipated earlier this summer.
“The downside risk to Direct Line standalone strategy of delivering cost savings and switching the Direct Line brand to PCWs has increased in our view. As such, engaging with Aviva to fully explore their offer in more detail would make sense.”
“In our view, the combination of Aviva and Direct Line would further strengthen Aviva’s position in the UK personal lines market and take its market share in UK Motor to 22% at a time when Motor rates are starting to peak and regulators are again reviewing underwriting practices in the UK Motor market.
“As such, whilst the integration of Direct Line and Aviva would be disruptive and Aviva has not disclosed a clear integration plan, Aviva suggests it can deliver cost synergies incremental to the £100m Direct Line targeted on a standalone basis in 2026E.”
Back in February, Direct Line also rejected an acquisition offer from Ageas, labelling it unattractive. Ageas later submitted an improved possible offer to Direct Line’s Board of Directors, but they again rejected the offer, expressing confidence in their standalone prospects. Both of these offers were below the most recent made by Aviva.
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