Aviva prepares to buy Direct Line as insurance giant prepares improved £3.6bn deal

Direct Line will back an upgraded £3.6bn takeover by Aviva, valuing it almost 75 per cent above its previous share price, after the insurance giant’s first bid was rejected.

It told shareholders on Friday that its board would recommend a cash and share offer valuing Direct Line at 275 pence a share if Aviva made a formal offer, having rejected Aviva’s “highly opportunistic” offer of 250 pence a share. last week.

The offer comprises 129.7 pence in cash, 0.2867 new Aviva shares and dividend payments of “up to” 5 pence per Direct Line share in total, reflecting a mammoth 73.3 per cent premium to the price closing of the shares prior to the offer on November 27.

The pair have already reached preliminary agreement on the deal, under which Direct Line shareholders would own approximately 12.5 percent of the enlarged group.

But Aviva must formalize the offer by December 25 or withdraw.

Direct Line’s board says it is “confident” in the company’s prospects as an independent business and remains convinced in its leadership and strategy.

However, Direct Line says the potential deal “has a value that it would be willing to recommend.”

It is the third bid for the insurer in less than 12 months, with Direct Line managing to fend off a takeover attempt by Belgian rival Ageas earlier this year.

The offer comes just weeks after Direct Line boss Adam Winslow, who took over at the beginning of March, announced the company was cutting 550 jobs as part of a £100m cost-savings programme. to revive his fortune.

Aviva believes the deal makes “strong strategic and financial logic”, while Direct Line’s board agrees it would “provide significant synergies” and create “substantial additional value for both sets of shareholders”.

However, some experts believe that purchasing the insurance could result in higher bills for customers.

Supply interest has helped drive Hotline Actions almost 30 per cent since the start of the year to 237.8p at Thursday’s close. However, they have lost more than 20 percent in the last five years.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: ‘Direct Line has been through some serious bumps lately.

‘Market share has been falling, underwriting hasn’t exactly been perfect and regulators have been knocking on the door.

‘But with a new management team at the helm, the company has been working on a bold turnaround plan.

‘For Aviva, the price is pushing the envelope of good value, but acquiring Direct Line could be a strategic jackpot.

“It cements its place as a heavyweight in the UK home and motor insurance markets and provides new opportunities to lead Direct Line’s transformation, whilst eliminating efficiency gains.”