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Aviva has contacted shareholders in Direct Line in a move that could pave the way for a hostile takeover bid for its smaller rival.
The FTSE 100 insurer began to approach its target’s shareholders on Thursday, according to people familiar with the move, after Direct Line’s board dismissed Aviva’s £3.3bn takeover proposal as “highly opportunistic” and “substantially” too low.
Aviva’s appeal to investors came after the £13bn insurance group said on Wednesday that Direct Line, predominantly a provider of motor cover, had declined to engage in a non-binding bid approach first made on November 19.
The shareholder outreach is designed to persuade the Direct Line board to come to the table, according to people familiar with Aviva’s plan.
Aviva disclosed on Wednesday that the Direct Line board had this week rejected its cash-and-shares offer, valuing Direct Line at 250p per share.
A combination of Aviva and Direct Line would create an insurance group with more than a fifth of the motor market and about 15 per cent of the home insurance segment, according to research by MKP Advisors.
Direct Line’s new boss, Adam Winslow, is a former executive at Aviva and the two insurers have large shareholders in common such as Schroders and Redwheel.
The offer comes after a difficult couple of years for Direct Line. Former chief executive Penny James stepped down in 2023 shortly after the insurer issued profit warnings and scrapped its dividend, which has since been restored.
Aviva described its proposal as “highly attractive”, with the approach representing a near 60 per cent premium to Direct Line’s closing price of 157.8p on Wednesday.
Direct Line shares closed up 41 per cent on Thursday at 224.4p. Aviva shares closed down 2 per cent at 479.5p.
One top-20 Direct Line investor said: “The offer undervalues the business, especially as Aviva has motor so they can combine them and extract synergies.”
However, he added that most Direct Line shareholders would probably tender their shares at 300p.
Many analysts believe Aviva will need to raise its bid to win over Direct Line. Peel Hunt said a 260p-265p bid could “help satisfy” the board, adding there was “downside risk” to Direct Line’s standalone strategy.
Dan Coatsworth, investment analyst at AJ Bell, said Direct Line had “tremendous” brand strength in the general insurance market and significant scale but a 275p bid could make Direct Line shareholders “feel that Christmas has come early”.
Under the Takeover Code, Aviva has until 5pm on December 25 to either make a firm offer or announce that it does not intend to.
The Aviva offer was the third takeover bid Direct Line has received this year, having rebuffed two approaches from Belgian insurer Ageas.
Aviva’s offer was just over 7 per cent above Ageas’s first offer and 5.4 per cent above the second.
“Given that this is a relatively small uplift from the previous two offers, and the consideration is similarly split between cash and shares, we are unsurprised that the bid was rejected,” said analysts at Jefferies, adding that “an offer of at least 270p might be acceptable”.
Aviva declined to comment on Thursday’s developments.
Defending its decision to rebuff the Aviva proposal, Direct Line said it had “considerable conviction” in the capabilities of its newly established leadership team, including Winslow, to turn around the business and “expects to deliver attractive growth in profitability, capital generation and shareholder returns”.
This story has been updated since publication to correct Adam Winslow’s name.
