British motor insurer Direct Line has signed a preliminary agreement on the financial terms for a sweetened buyout bid of £3.6bn ($4.6bn), or 275 pence per share, from Aviva.
This offer marks an increase from the initial 250 pence per share bid, which Direct Line previously rejected.
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The acquisition would consolidate Aviva’s position in the UK motor insurance market, creating an entity with a combined market capitalisation of approximately £16.6bn, reported the Financial Times.
According to the proposal, Aviva would pay 129.7 pence in cash and 0.2867 of its own shares for each Direct Line share, with Direct Line shareholders also receiving a five pence-per-share dividend before the deal’s completion.
The new proposal represents a 73.3% premium over Direct Line’s closing share price on 27 November 2024, and a 49.7% premium over the six-month volume-weighted average share price on the same date.
The Direct Line board has indicated that this valuation is favourable and could lead to a recommendation to shareholders, contingent on a “firm intention to make an offer” and the completion of mutual due diligence.
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By GlobalDataDirect Line shareholders would own nearly 12.5% of the issued and to be issued share capital of the merged company.
After discussions with advisers and shareholders, Direct Line’s board is inclined to endorse the offer, according to the release.
In the joint announcement, the company stated: “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.”
Last month, Direct Line turned down Aviva’s previous offer, saying it was “highly opportunistic and substantially undervalued the company”.
Reaction to the Aviva Direct Line deal
Dean Standing, chief customer officer at Sagacity, said: “Getting this deal over the line may look like an early Christmas present for Aviva – but the hard work is only just beginning. An M&A is not just about merging two businesses – it also means bringing together both organisations’ data. As companies with large customer bases, if data is spread across siloes, legacy systems and contact channels, joining it together could be a long, complicated process.
“Aviva could start interrogating the data landscape it has purchased. How accurate is the new data it will be folding into its existing base, will two bases even be brought together, and from a compliance standpoint, what permissions does it hold around processing and sharing? There is a duty to ensure Direct Line customers’ data is protected, and organisational changes are correctly communicated to them.
“To get moving, Aviva can harness the power of analytics to pull all data points together to create a single customer view. They will then be able to merge applicable records, identify cross-sell opportunities and start creating new tariffs and bundles. With decisions to be made across the two organisations, the devil is in the data with M&As and time is of the essence to start work on the tasks ahead.”
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 view.
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.”
