Direct Line agrees a £3.7 billion takeover of Aviva before the Christmas deadline

Aviva has finally closed a deal to acquire fellow insurer Direct Line for £3.7 billion ahead of the Christmas deadline.

Britain’s largest life insurer made a £3.3 billion bid in November, but Direct Line rejected it on the grounds that the company was ‘substantially undervalued’.

With Direct Line’s board having until 5pm on Christmas Day to agree on a concrete proposal, it said it would support the higher bid.

It has now accepted an offer under which Direct Line investors will receive 0.2867 new Aviva shares, 129.7 pence in cash and a dividend of up to 5 pence per share for each Direct Line share they hold.

This represents a 73.5 percent premium to Direct Line’s closing price on November 27, the last day before the start of the offer period.

Once the deal is completed, Aviva investors will own approximately 87.5 percent of the expanded business, while Direct Line shareholders will own the remaining 12.5 percent.

Aviva believes the acquisition will strengthen its presence in the UK personal lines market, which generated at least £26 billion in gross premiums last year.

The FTSE 100 group also expects it will create ‘better outcomes’ for customers, such as competitive pricing, greater investment in technology and faster claims payments.

Since Dame Amanda Blanc became CEO of Aviva in 2020, the company has sought to simplify operations by focusing on its core markets: the United Kingdom, Canada and the Republic of Ireland.

At the same time, Aviva has made significant payouts to its shareholders, funded by the sale of some international divisions, and selectively pursued takeover deals.

Blanc said the Direct Line deal “builds on our track record of four years of strong financial performance and, in line with our strategy, accelerates our growth in capital-light businesses.”

Direct Line rejected numerous takeover offers from Belgian insurance giant Ageas earlier this year, most recently valuing the company at £3.2 billion.

Ageas first approached the company just before Adam Winslow took over as CEO of Direct Line from Penny James in March, having previously headed Aviva’s insurance business in the UK and Ireland.

Under James, Direct Line struggled with inflation and supply chain problems, which increased car repair costs, and new rules that stopped insurance companies from ‘price hiking’, forcing loyal customers to pay higher premiums.

Winslow is leading a turnaround strategy at Direct Line, which includes growing policy sales and a £100 million cost savings programme.

Its actions appear to be paying off, with the company reporting pre-tax profits of £61.6 million for the first six months of 2024, compared to £76.3 million for the same period last year.

Yet Direct Line bosses said the company’s share price and valuation did not ‘appropriately reflect the potential for the business’, suggesting the group’s shares closed at a 12-month low before Aviva’s original proposal .

Danuta Gray, chairman, said: ‘Direct Line is in the early stages of a comprehensive turnaround and believes the offer will enable Direct Line shareholders to realize the value of their investment in the short term.’

Direct Line Insurance Group Shares were 2.8 percent higher at 250p on Monday morning. Aviva shares fell 0.1 percent to 456.6p.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: ‘While the new management team has worked to steady the ship, even they couldn’t deny that Aviva’s offer was the golden ticket that they would struggle to copy on their own.

“While they have expressed confidence in their independent strategy, this proposal was simply too compelling to pass up.”