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Aviva has contacted Direct Line’s shareholders in a move that could pave the way for a hostile takeover bid for its smaller rival.
The FTSE 100 insurer began approaching target shareholders on Thursday, according to people familiar with the move. It came after Direct Line’s board dismissed Aviva’s £3.3 billion takeover offer as “highly opportunistic” and “substantially” too low.
Aviva’s appeal to investors comes after the £13 billion insurance giant announced on Wednesday that Direct Line, primarily a car insurance provider, had declined to take part in a non-binding tender approach first made on November 19. .
The shareholder outreach is designed to persuade Direct Line’s board to attend the meeting, according to people familiar with Aviva’s plans.
Aviva said on Wednesday that Direct Line’s board had rejected its cash and share offer this week, valuing Direct Line at 250p per share.
The combination of Aviva and Direct Line would create an insurance giant with more than a fifth of the car market and around 15% of the home insurance sector, according to research by MKP Advisors.
Direct Line’s new boss, Adam Winslow, is a former Aviva executive and the two insurers share majority shareholders with Schroders and Redwheel.
The proposals come after a difficult few years for Direct Line. Former CEO Penny James resigned in 2023 shortly after the insurer issued a profit warning and scrapped its dividend, which was later restored.
Aviva described its offer as “very attractive”, with the approach representing a premium of around 60% over Direct Line’s closing price of 157.8p on Wednesday.
Direct Line shares rose 41% to 224.4p on Thursday. Aviva shares fell 2% to 479.5p.
One of the top 20 Direct Line investors said: “This offer understates the value of the business, especially as Aviva has the motor to combine it and extract synergies.”
But he added that most Direct Line shareholders would probably bid for shares at 300p.
Many analysts believe Aviva will have to raise its bid to win against Direct Line. Peel Hunt said a 260p-265p bid “could help satisfy” the board, adding there were “downside risks” to Direct Line’s standalone strategy.
Dan Coatsworth, investment analyst at AJ Bell, said Direct Line had “tremendous” brand power in the general insurance market and significant volumes, but the 275p bid could make Direct Line shareholders “feel like Christmas came early”.
Under the Takeover Code, Aviva has until 5pm on December 25 to make a firm offer or announce that it does not intend to make an offer.
The Aviva offer is the third takeover bid Direct Line has received this year, having rejected two approaches from Belgian insurer Ageas.
Aviva’s offer was just over 7% higher than Ageas’ first offer and 5.4% higher than its second offer.
“Given this is a relatively small increase over the previous two offers and the consideration was split similarly between cash and stock, it is not surprising that the bid was rejected,” Jefferies analysts said. 270p You can accept it.”
Aviva declined to comment on the situation on Thursday.
Direct Line defended its decision to reject the Aviva offer, saying it had “substantial confidence” in the ability of its newly established leadership team, including Winslow, to turn the business around and that it would “deliver attractive growth in terms of profitability, capital generation and shareholders”. “I expect that,” he said. report”.
This story was updated after publication to correct Adam Winslow’s name.
