Aviva is to acquire Direct Line as insurance giant prepares a £3.6 billion deal

Direct Line will back a £3.6 billion takeover by Aviva, valuing the company at almost 75 percent above its previous share price, after the insurance giant’s initial offer was rejected.

On Friday it told shareholders that its board would recommend a cash and shares offer, valuing Direct Line at 275 pence per share if Aviva made a formal offer, following Aviva’s ‘highly opportunistic’ offer of 250 pence per share rejected last week.

The offer includes 129.7p in cash, 0.2867 new Aviva shares and dividend payments of ‘up to’ 5p per Direct Line share in total, reflecting a massive 73.3 per cent premium on the share’s closing price before the offer on November 27.

The pair have already reached a preliminary agreement on the deal, which would see Direct Line shareholders own around 12.5 percent of the expanded group.

But Aviva must formalize the offer before December 25 or it will expire.

Direct Line’s board says it is ‘confident’ in the company’s prospects as a standalone business, and remains convinced of its leadership and strategy.

However, Direct Line says the potential offering ‘has a value that it would be happy to recommend’.

It is the third bid for the insurer in less than 12 months, with Direct Line successfully fending off a takeover attempt from 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 £100 million cost-cutting program to revive its fortunes.

Aviva believes the deal has ‘strong strategic and financial logic’, while Direct Line’s board agrees it would ‘deliver significant synergies’ and ‘create substantial additional value for both groups of shareholders’.

However, some experts believe the insurance takeover could lead to higher bills for customers.

Bidding interest has helped drive the stock forward Direct Line shares almost 30 percent since the start of the year to 237.8p as of close on Thursday. However, they have lost more than 20 percent over the past five years.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: ‘Direct Line has had some serious gaps in the market recently.

‘Market share has fallen, acceptance has not exactly gone smoothly and the regulators have been knocking on the door.

“But with a fresh leadership team at the helm, the company has been working on a bold turnaround plan.

‘For Aviva, the price pushes the boundaries of good value, but acquiring Direct Line could be a strategic jackpot.

“It consolidates their position as a heavyweight in the UK home and car insurance markets and provides new opportunities to drive Direct Line’s transformation, while maximizing efficiency gains.”