The Christmas bidding battle is brewing for Direct Line after the insurer rejected rival Aviva’s shock £3.3bn takeover offer.

Shares in Direct Line soared yesterday after a surprise £3.3bn takeover bid from rival Aviva raised the prospect of a Christmas bidding war for the troubled insurer.

The stock soared 41.4 per cent, or 65.7p, to 224.4p, an eight-month high, as traders reacted to the revelation that it had rejected an approach.

One investor said Aviva may have to raise as much as £3.9bn to close the deal amid speculation that Belgian insurer Ageas, a previous suitor, could re-enter the fray.

Aviva is now contacting shareholders directly in an apparent attempt to pave the way for a hostile takeover.

It came as a flurry of commercial activity engulfed the city, with cafe group Loungers accepting a £338m bid from US investment group Fortress and waste management firm Renewi succumbing to a £701m bid from the bank Australian Macquarie.

“Acquisition activity was red hot in the UK market,” said Dan Coatsworth, investment analyst at AJ Bell.

Aviva’s offer of 250 pence per share, comprising a mix of cash and shares, was revealed late on Wednesday.

This was a premium of almost 60 per cent to Direct Line’s share price. Aviva said it was “very attractive” but Direct Line said it was “very opportunistic and substantially undervalued the company”.

Under ‘put up or shut up’ takeover rules, Aviva now has until 5pm on Christmas Day to announce a firm offer or withdraw. Aviva said that after the rejection of its offer this week, Direct Line had refused to collaborate with it any further.

However, it emerged that Aviva chairman George Culmer met Direct Line chairman Danuta Gray to discuss the offer, appearing to suggest the latter was open to some form of deal.

Yesterday the management of Direct Line held talks with shareholders. Some, including Redwheel and Schroders, are also major investors in Aviva.

One of the target company’s top 20 shareholders told the Financial Times that most investors would probably accept a 300p offer. Analysts at investment bank KBW also suggested Aviva could make a valuation of 300p.

Analysts at Peel Hunt put a lower target on it, suggesting that if Aviva were able to “sweeten the deal” to something like 250p-265p, that could “help satisfy” Direct Line’s board.

“They said Direct Line’s recovery path may prove ‘bumpier than anticipated’, adding that exploring Aviva’s bid ‘in more detail would, in our view, make sense.’

Aviva’s approach is the second takeover bid Direct Line boss Adam Winslow has had to deal with since taking over this spring. In March it rejected a proposal from Ageas for 239 pence per share.

Analysts at Barclays suggested yesterday that Ageas could now return. “In our recent conversations with Ageas management, the CEO has reiterated strategic interest in the UK personal lines (home and auto) market, including Direct Line as a suitable asset, whilst clearly ruling out a hostile approach,” they said. in a note.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said Direct Line was “playing hard to get it back.”

He added: ‘Aviva is arguably a better candidate, given it already shares markets with Direct Line in the UK, but it will need to up its game and deliver, if it wants Direct Line to take the proposition seriously.’