Aviva AV. on Wednesday said it had made an approach to buy Direct Line Insurance DLG, which had been rejected. Direct Line shares rose nearly 40% on Wednesday to 220p per share, valuing the company just below £3 billion.
FTSE 100 life and pensions company Aviva said the cash and shares proposal was made last Tuesday. Direct Line shareholders would be entitled to receive 112.5p per share in cash, and 0.282 new Aviva shares per Direct Line share.
Based on Aviva’s share price on the day before the proposal was submitted, the plan valued Direct Line at 250p per share or around £3.26 billion. Aviva has until Dec. 25 to firm up its intentions for Direct Line.
Aviva said it was a “highly attractive” and compelling" offer with “high execution certainty”, which also met Aviva’s strict financial criteria for acquisitions.
But Aviva said Direct Line on Tuesday had rejected the proposal as substantially undervaluing Direct Line, and has declined to engage further with Aviva.
In a statement, Direct Line, motor and home financial services group, said it had concluded that the plan was “highly opportunistic and substantially undervalued the company.”
Why Direct Line Should Say Yes to Aviva
“With Direct Line‘s rejection of a bid from Aviva, we’ve taken a closer look at the company, its management and strategy. We would be in favor of management taking the offer or a higher one if one arrives,” says Morningstar insurance analyst Henry Heathfield.
“The company has not delivered sustained growth in its core divisions over the last ten years.
“Direct Line is a no moat business with high uncertainty and poor capital allocation because of continued investments in technology that have not resulted in tangible business developments where they have for other firms.”
Key Morningstar Metrics for Direct Line
- Morningstar Rating: ★★★★
- Fair Value Estimate: GBX 215.00
- Economic Moat: None
Direct Line Rejected Offers Before
In March, Ageas AG withdrew a proposed bid for Direct Line after failing to secure the backing of its UK peer.
The Belgian insurer had made two proposals to buy Direct Line, but its advances were rejected. The two approaches valued each share in Direct Line at 233p and 239p per share respectively.
Direct Line rejected both, describing them as “uncertain” and “unattractive”, significantly undervaluing its future prospects.
Direct Line has undertaken a strategic revamp under the stewardship of chief executive Adam Winslow, who the firm poached from potential suitor Aviva.
Aviva believes the acquisition would be consistent with its strategy to accelerate growth in its UK businesses and further pivot the group towards capital-light business lines.
The acquisition would expand Aviva’s presence in the attractive UK Personal Lines market. In addition, the acquisition would allow Direct Line customers to benefit from Aviva’s breadth, scale and financial strength.
Further, a deal would deliver “material cost and capital synergies, incremental to Direct Line’s existing cost-savings programme, Aviva stated.
Aviva said it remains committed to delivering growing dividends and sustainable capital returns to its shareholders.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
