A Christmas bidding battle ensues for Direct Line after the insurer rejected rival Aviva’s shock £3.3 billion takeover bid
Direct Line shares rose yesterday after a shock £3.3 billion takeover bid from rival Aviva raised the prospect of a bidding war for the troubled insurer.
The stock rose 41.4 percent, 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 need to raise up to £3.9 billion to complete 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 wave of deal activity swept the city, with cafe-bar group Loungers accepting a £338m bid from US investment group Fortress and waste management company Renewi succumbing to a £701m offer from Australian bank Macquarie.
“Takeover activity has been huge in the UK market,” said Dan Coatsworth, investment analyst at AJ Bell.
Direct Line shares jumped 41% after the insurer, led by boss Adam Winslow (right), rejected an approach from rival Aviva, led by Amanda Blanc (left).
Aviva’s offer of 250p per share, made up of a mix of cash and shares, was announced late on Wednesday.
That was a premium of almost 60 percent compared to Direct Line’s share price. Aviva said it was ‘very attractive’, but Direct Line said it was ‘highly opportunistic and significantly 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 walk away. Aviva said that after rejecting its bid this week, Direct Line “declined to engage with it further.”
However, it emerged that Aviva chairman George Culmer met with Direct Line chairman Danuta Gray to discuss the offer, which seemed to suggest the latter was open to some kind of deal.
Yesterday, Direct Line management was in discussions with shareholders. Some, including Redwheel and Schroders, are also major investors in Aviva.
One top 20 shareholder of the target company told the Financial Times that most investors would likely accept a 300 cent offer. Analysts at investment bank KBW also suggested Aviva could make a valuation of 300p.
Analysts at Peel Hunt had set a lower target, suggesting that if Aviva is able to ‘tighten’ the deal to something like 250p-265p, it could ‘help appease’ the Direct Line board.
‘They said Direct Line’s troubled turnaround path ‘could prove more awkward than expected’, adding that exploring Aviva’s offer ‘would make sense in our view’.
Aviva’s approach is the second takeover bid Direct Line boss Adam Winslow has faced since taking over this spring. It rejected an approach from Ageas of 239p per share in March.
Analysts at Barclays suggested yesterday that Ageas could now come back. “In our recent discussions with Ageas management, the CEO reiterated the strategic interest in the UK private lines market (home and car), including Direct Line as a suitable asset, although he clearly rules out a hostile approach,” they write in a note.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said Direct Line was “playing hard to get again”.
He added: ‘There is a case to be made that Aviva is a better candidate as it already shares markets with Direct Line in Britain, but it will need to up its game and offer, if it wants Direct Line to take over the proposal serious.’
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