Aviva has agreed a deal to buy Direct Line for £3.6bn, which at this preliminary stage will see 129.7 pence per Direct Line share in cash, 0.2867 new Aviva shares per Direct Line share and a dividend payments of up to 5 pence per Direct Line share.
In a joint statement today (6 December) they said: “The board of Direct Line remains confident in Direct Line’s prospects as a standalone company and continues to have conviction in the capabilities of the newly established leadership team to deliver the announced strategy.
“That said, the board of Direct Line has carefully considered the proposal with its advisers and consulted with Direct Line shareholders during the offer period, and has concluded that the proposal is at a value that it would be minded to recommend to Direct Line shareholders should a firm intention to make an offer pursuant to Rule 2.7 of the Code be announced on such financial terms, subject to agreement of all other terms and conditions of an offer and completion of reciprocal customary due diligence.
“Direct Line shareholders would own approximately 12.5% of the issued and to be issued share capital of Aviva. The Direct Line board believes that, in addition to the attractive headline value per share, the combination would provide the opportunity to deliver significant synergies, creating substantial additional value for both sets of shareholders.
“Aviva believes in the strong strategic and financial logic for a combination of Direct Line into the Aviva group, details of which were set out in Aviva’s announcement of 27 November 2024.”
In early reaction Matt Britzman, senior equity analyst, Hargreaves Lansdown said: “Direct Line has finally relented, accepting Aviva’s 275p per share offer after resisting an earlier proposal in recent weeks. The deal, a mix of cash, shares, and a small dividend, delivers a 73% premium to Direct Line’s pre-offer price. Direct Line’s board had been holding out, insisting they could make it on their own. But even they had to admit that Aviva’s proposal is a golden ticket they’d struggle to match independently. Confidence in their solo strategy aside, this offer was just too good to pass up.
“Let’s not sugarcoat it: Direct Line has hit some serious potholes lately. Market share has been sliding, underwriting hasn’t exactly been flawless, and regulators have been knocking on the door. But with a fresh leadership team at the wheel, the company has been working on a bold turnaround plan. For Aviva, the price is pushing the limit of good value but snapping up Direct Line could be a strategic jackpot. It cements their place as a heavyweight in the UK home and motor insurance markets and brings fresh opportunities to steer Direct Line’s transformation, while squeezing out efficiency gains from their combined scale.”
Clive Beagles and James Lowen, the co-managers of JOHCM UK Equity Income Fund believe the proposed Direct Line transaction looks positive from a strategic and earnings accretive perspective.
There are also important capital diversification benefits as well as likely significant synergies. They believe it will create a powerful position in the UK general insurance market, which should help continue the re-rating of Aviva, which is a process in motion, driven by the changes in group structure and capital allocation since Amanda Blanc became CEO.
Clive Beagles, senior fund manager, commented: “We are surprised that Direct Line rejected the offer outright given the headline price but also, cognisant that part of the offer is in paper, where the dividend uplift and upside vs Direct Line standalone looks significant.”
James Lowen, senior fund manager, continued: “One only has to look at the uplift in the DS Smith share price since the initial offer from International Paper, to see the power of this dynamic. If we were shareholders in Direct Line we would be looking at this impact as well as the headline price.”
