The Direct Line (LSE:DLG) share price jumped 7.6% on Friday (6 December), extending gains from the previous week, after a preliminary agreement was reached with Aviva (LSE:AV.).
Aviva, the UK’s largest insurance group, will acquire Direct Line’s business in a cash and stock offer worth 275p per share. On Friday, the share rose accordingly, pushing towards the proposed acquisition price.
The takeover saga
Direct Line’s management had rejected Aviva’s first offer and described it as “highly opportunistic”, noting that they were confident in the company’s ability to thrive on its own.
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However, Aviva’s persistence paid off with an improved bid, valuing Direct Line at £3.6bn. The 275p figure represents a significant 73.3% premium over Direct Line’s pre-bid share price.
The deal, if finalised, would create a formidable insurance giant in the UK market. Despite accepting the offer, Direct Line’s board maintains confidence in its standalone prospects and the capabilities of its leadership team.
This potential takeover comes after a turbulent period for Direct Line, marked by profit warnings and leadership changes, making the timing of Aviva’s bid particularly strategic.
I’d held the stock around two years ago, but the business started to falter and the sizeable dividend yield became unsustainable. Essentially, it was a bad pick in a sector that hasn’t performed overly well in a higher interest rate environment. I sold some time ago.
What happens now?
Now that Direct Line’s management has indicated its willingness to accept Aviva’s improved offer, the FTSE 100 insurer must formalise its offer by Christmas Day, as per City takeover rules.
If Aviva proceeds, the deal will face scrutiny from regulatory bodies, including the competition watchdog and the Bank of England’s insurance supervisors due to the significant market share the combined entity would hold in motor and home insurance sectors.
Shareholders of both companies will need to vote on the proposal. If approved, the integration process will begin, likely resulting in significant synergies but also potential job cuts beyond the 550 already planned by Direct Line.
The leadership team, including CEO Adam Winslow, who recently joined from Aviva, will likely play an important role in managing the transition and implementing the combined strategy.
What does this mean for investors?
The Direct Line share price is currently trading at a modest discount to the proposed takeover price, suggesting there’s little opportunity for investors to buy today and benefit.
And there’s the possibility that the deal could collapse for several reasons — hence the discount to the proposed takeover price. That would likely result in the share price collapsing from the current elevated levels.
For context, the stock was trading as low as 147p just a few weeks ago. It’s not unrealistic to imagine the stock falling back there if Aviva turns away from the deal or the regulator takes concern with the takeover.
