Two of the biggest names in British insurance are locked in a takeover battle that could reshape the UK market.
Aviva, the £13bn UK insurance giant whose roots can be traced back to the late 17th century, is going after a younger, younger Direct Line group: a household name known for its car cover and its marketing mascot – a red telephone on wheels.
However, so was Aviva’s £3.3bn bid for Direct Line Strongly refused By the latter’s board earlier this week, prompting Aviva to appeal directly to shareholders of its smaller rival.
Where could Aviva go next in its pursuit of Direct Line and what are the implications for the UK insurance market?
Why would Aviva want to buy Direct Line?
Aviva It believes that the tie-up with Direct Line would enhance its exposure in the personal insurance market and provide “material” cost and capital synergies. Aviva also believes the deal will help the group, which has a significant life insurance book, shift towards a capital-light business.
Mrs. Amanda Blank, CEO of Aviva since 2020is keen to accelerate the group’s performance, partly through acquisitions. She overhauled the group, selling a series of overseas operations early in her tenure and returning billions of pounds to shareholders.
The approach taken by the FTSE 100 group is as follows Direct lineFounded in 1985, its brands include Churchill, Green Flag and Darwin, and it is now in the early stages of its recovery plan.
“It’s no secret that Direct Line has struggled over the past few years to navigate the challenging car insurance market, and operational missteps have been a drag on performance,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.
New management, including chief executive Adam Winslow – Aviva’s head of general insurance in the UK and Ireland until the start of this year, when he moved to its smaller rival – was appointed this year, to help turn around the loss-making business, and recent results are more promising.
Winslow, the son of the founder of price comparison website Compare the Market, has also appointed Direct Line’s CFO and Aviva’s Chief Risk Officer as part of the move. Planned transformation.
But weakness in Direct Line’s share price has made the group vulnerable to a takeover.
What are the terms of the deal?
Aviva made an initial offer on November 19 valuing the direct line business at 250 pence per share, or about £3.3 billion.
The proposal consists of 112.5p in cash plus 0.282 new Aviva shares for every Direct Line share.
Aviva described its proposal, which represents a 57.5 per cent premium to Direct Line’s closing share price on November 27, as “highly compelling”.
But Direct Line’s board of directors, chaired by Danuta Gray, disagreed. She called the proposal “extremely opportunistic” and undervalued the company “significantly.”
Aviva said the FTSE 250 group declined to participate further after its proposal was rejected.
Later, Aviva I started calling The Financial Times previously reported that Direct Line shareholders are trying to encourage Direct Line’s board to come to the table. This could pave the way for a potential hostile takeover.
A source close to Direct Line said: “The ball is in Aviva’s court.”
Aviva has until 5pm on December 25 to submit a firm offer or withdraw. It will make for a busy Christmas for the insurer and its bankers at Goldman Sachs, who originally advised Direct Line on its rejection of Belgian insurer Ageas earlier in the year. Clifford Chance also advises Aviva.
For its part, Direct Line turned to Morgan Stanley, Robbie Warshaw, Slaughter & May, and Brunswick, among other advisors.
What do shareholders think?
Initial shareholder reaction was positive, with Direct Line shares rising 41 percent.
The two insurers have some major joint shareholders – including Schroders, Fidelity, Redwell and M&G.
One of Direct Line’s top 20 shareholders said Aviva’s offer was not surprising, given the amount of excess cash held by the insurer and the opportunity for car companies to merge to boost scale and extract costs.
“The reason Direct Line described this as opportunistic is because they were going through a period of transformation. They have highly qualified executives who all come from Aviva,” the investor said.
Although he believed the 250p-a-share offer undervalued Direct Line, he expected most investors would support a 300p offer.
Another important Direct Line shareholder confirmed that Aviva had contacted his organization directly. “The offer came out of the blue. We will make a decision by early next week. Could a private equity buyer come in? That might be a reason to hold out.”
Where can Aviva go from here?
Analysts believe Aviva will need to dig deeper into its pockets to win its target.
“Direct Line’s lenient valuation (but probably fair on a standalone basis), combined with… synergies, would make the deal financially accretive,” analysts at Jefferies said. “With this in mind, we wouldn’t be surprised if Aviva has made an additional offer and we therefore reiterate our view that an offer of at least 270p may be acceptable.”
Analysts at KBW believe the deal would become “borderline” for Aviva at around 300p per share.
The deal buzz around Direct Line could also bring out of the woodwork old suitors such as Ageas, which has made Two failed bids to buy Direct Line this year.
“The old Ageas offer is currently worth around 260p for comparison,” MKP Advisors said. “Ageas stock has been strong since the end of the Direct Line offering.”
KBW analyst William Hawkins said the Aviva-Direct Line combination was “the most logical to add value for investors”.
However, he added: “Looking at the broader picture, we believe the emergence of a counter-bidder who can provide a higher cash component in the offer and commit to supporting growth at DLG should not be ruled out.”
Agias declined to comment.
Can the transaction be blocked?
The combination of Aviva and Direct Line could raise competition concerns in certain sectors due to the two groups’ dominance in the car and home insurance markets.
Figures from comparison website Confused.com show that Direct Line owns 10.8 per cent of the car insurance sector, making it the second largest player, while Aviva comes close at 10.5 per cent. The deal would result in an enlarged group controlling more than a fifth of the market.
The UK Competition and Markets Authority is likely to review any deal that pushes market share in a product area beyond 25 per cent.
Aviva also dominates the home insurance market with an 8.7 per cent share while Direct Line has 6.2 per cent, according to Confused.com.
The CMA “will have a view on the combined group, but we assume Aviva has looked at this and ruled it out as an issue,” said Barry Cornes, an analyst at Panmure Liberum.
Any merger would need approval not only from the Capital Markets Authority, but also from the Bank of England’s Prudential Regulatory Authority, in what would be the first major test of its mandate to compete as the regulator of insurance companies.
Additional reporting by Ian Smith in London
