Direct Line agrees £3.7bn acquisition of Aviva ahead of Christmas deadline

Aviva has finally agreed a deal to acquire insurer Direct Line for £3.7bn, ahead of the Christmas Day deadline.

Britain’s biggest life insurer made a £3.3bn proposal in November but Direct Line rejected it on the grounds that it “substantially undervalued” the company.

Having been given until 5pm on Christmas Day to agree a concrete proposal, Direct Line’s board said it would support the highest bid.

It has now accepted an offer which will see Direct Line investors receive 0.2867 new Aviva shares, 129.7p in cash and a dividend of up to 5p per share for each Direct Line share they hold.

This represents a 73.5 percent premium to Direct Line’s closing share price on Nov. 27, the last day before the start of the offering period.

Once the deal closes, Aviva investors will own around 87.5 per cent of the expanded business, while Direct Line shareholders will own the remaining 12.5 per cent.

Aviva believes the acquisition will strengthen its presence in the UK personal lines market, which generated at least £26 billion in gross written premiums last year.

The FTSE 100 group also hopes it will create “better outcomes” for customers, such as competitive pricing, greater investment in technology and faster claims payouts.

Since Dame Amanda Blanc became chief executive of Aviva in 2020, the company has sought to simplify operations by focusing on its core markets: the United Kingdom, Canada and the Republic of Ireland.

At the same time, Aviva has delivered significant payouts to its shareholders, which were funded by the sale of some international divisions, and selectively pursued acquisition deals.

Blanc said the Direct Line deal “builds on our track record of delivering four years of strong financial performance and, in line with our strategy, accelerates our growth in capital-light businesses.”

Direct Line rejected numerous takeover offers earlier this year from Belgian insurance giant Ageas, with the most recent valuing the business at £3.2bn.

Ageas first approached the company just before Adam Winslow succeeded Penny James as CEO of Direct Line in March, having previously been head of Aviva’s UK and Ireland insurance operations.

Under James, Direct Line fought inflation and supply chain problems, which increased engine repair costs, and new rules that prevented insurance companies from “repricing,” imposing higher premiums on insurance companies. loyal customers.

Winslow is leading a turnaround strategy at Direct Line which includes increased policy sales and a £100m cost reduction programme.

Its actions appear to be paying off, as the company reported a pre-tax profit of £61.6 million for the first six months of 2024, compared to £76.3 million during the same period from last year.

However, Direct Line bosses said the company’s share price and valuation did not “adequately reflect the potential of the business”, pointing out that the group’s shares closed at a 12-month low before the initial proposal for Aviva.

Danuta Gray, its president, said: “Direct Line is in the early stages of a radical turnaround and believes the offer will allow Direct Line shareholders to realize the value of their investment in the short term.”

Direct Line Insurance Group The shares rose 2.8 per cent to 250p on Monday morning. aviva shares They were down 0.1 percent at 456.6 pence.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: “While the new management team has been working to steady the ship, even they couldn’t deny that Aviva’s offer was the golden ticket they would struggle to replicate on their own. .

“While they have expressed confidence in their independent strategy, this proposal was simply too compelling to pass up.”