Direct Line shares rise as insurer rejects Aviva’s £3.3bn takeover bid

Direct Line Actions surged more than 36 per cent early on Thursday after it rejected a £3.28bn takeover offer from larger rival Aviva, saying it “substantially undervalued” the business.

The insurer, which made the announcement after market hours on Wednesday, outpaced gains on the FTSE 250 mid-cap index, while Aviva shares fell around 3 per cent to be the biggest percentage loser on the index. front line FTSE 100.

Shares in Direct Line, which have fallen around 13 per cent so far this year, rose as much as 39 per cent to a more than eight-month high of 220 pence in early trading.

The stock is still trading below Aviva’s proposed offer price of 250 pence per share.

Under takeover rules, Aviva has until December 25 to make a firm offer or withdraw.

Jefferies analysts said they believed a higher bid could be made if Direct Line’s board considers committing to Aviva.

Henry Heathfield, equity analyst at Morningstar, said: “Aviva’s offer is a good fit – both companies are based in the UK and Aviva has focused on growing its non-life segment.

“The offer exceeds fair value estimates for Direct Line and, given the challenging targets outlined during Capital Markets Day, it makes sense to accept this deal, or a higher one, from Aviva.”

Last night it was revealed that Aviva had launched an audacious £3.3bn bid to buy troubled rival Direct Line.

The FTSE 100 insurance giant, led by Amanda Blanc, revealed it has submitted a bid for its smaller competitor worth 250 pence per share.

That was well above the 158.7p at which Direct Line shares were trading yesterday, valuing them at £2.1bn.

But the offer was rejected by Direct Line’s board, setting the stage for a takeover battle between now and Christmas.

Blanc and his team’s proposal offered Direct Line investors 112.5 pence in cash and 0.282 Aviva shares for every share they owned in Direct Line.

Altogether, it was a premium of about 60 percent over the insurer’s closing price the day before the offer was announced.

But Direct Line called Aviva’s bid “highly opportunistic” and said it “substantially undervalued the company.”

The dispute could lead to a hostile bid, with Aviva going directly to Direct Line shareholders and asking them to support the takeover against the wishes of its management.

It is the second 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 group suffered an embarrassment in August when it revealed an accounting error that led to its financial strength being reported as higher than it actually was.

Aviva’s blow came 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 cost-savings program £100 million to revive his fortune.

The cuts, which represent 5 per cent of the beleaguered insurance company’s workforce, were announced as the group revealed it had lost 71,000 own-brand motor insurance customers in the latest quarter. Direct Line has been pushing for price increases as the cost of insurance claims has soared.

But this has led to an exodus of its own-brand car insurance customers, with the total number falling to just over 3 million in the third quarter of this year.

Winslow’s strategy to boost customer numbers involves making Direct Line insurance available on price comparison websites for the first time, reversing years of resistance to the move under previous bosses.

But his efforts have so far failed to pay off for investors, with Direct Line’s share price having fallen almost 24 per cent since he came into business.

Direct Line’s leaders have even lost the support of its founder, Sir Peter Wood, an insurance magnate who set up the business as the UK’s first telephone-only insurer in 1985.

Wood, 78, told The Mail on Sunday in March that the group had been managed “terribly” for years, making it an easy target for predators.

He said it should be sold to a bidder who offered a “decent” price.

Sir Peter added that the company had been managed “so abysmally for so long” that it deserved to be taken over by a competitor.

By contrast, Aviva has seen the power of its share price ahead, up almost 13 per cent so far this year. They gained 1.6 per cent yesterday, closing at 489.3p.

This has left Blanc on the hunt for acquisition targets.

Last year the group acquired AIG Life for £460m and in March entered the Lloyd’s insurance market with a £242m deal to buy insurer Probitas.