Aviva plans strategic move for acquisition of Direct Line

The insurance giant Aviva has taken a remarkable step towards a potential hostile takeover attempt of Direct Line by directly contacting the investors of its smaller competitor. The background of these discussions is Aviva's offer of 250 pence per share, which was rejected by the board of Direct Line as opportunistic since it significantly undervalued the company. An insider from Aviva stated that this direct approach to the shareholders was intended to promote a more effective discussion with the board of Direct Line. By combining Aviva and Direct Line, an insurance giant could be created that would cover more than a fifth of the auto market and about 15 percent of the home insurance segment. Interestingly, Direct Line's new CEO, Mark Winslow, previously held a leadership position at Aviva, and both companies have common major shareholders, such as Schroders and Redwheel. In recent years, Direct Line has faced some challenges. After the then CEO Penny James resigned in 2023, the company issued profit warnings and suspended its dividend, which has now been resumed. Aviva made this takeover offer public after Direct Line refused to respond to an informal discussion proposal made on November 19. The formal cash and stock offer, valuing Direct Line at 250 pence per share, was rejected on November 26. Aviva described the offer as "highly attractive" as it was 60 percent above Direct Line's previous closing price. Driven by takeover rumors, Direct Line’s stock closed 41 percent higher the next day, while Aviva's stock fell by 2 percent. A major shareholder of Direct Line stated that the offer undervalued the business, especially considering the potential synergies. However, many shareholders might be inclined to sell their shares at an offer of 300 pence. Analysts expect that Aviva will need to increase its offer to convince the Direct Line board. An increase to 260-265 pence could satisfy the board. Dan Coatsworth of AJ Bell sees Direct Line's strong brand presence as an attractive element for Aviva. According to takeover rules, Aviva has until December 25 to make a binding offer or announce its withdrawal. Analysts from Jefferies and Peel Hunt believe that an increase to at least 270 pence could enhance the offer's chances of success. Meanwhile, Direct Line is relying on new leaders like Mark Winslow to get the company back on track and focus on growth in profits and capital returns.