Aviva (LSE: AV.) shareholders, of which I am one, have enjoyed another bumper set of returns in 2024. If the definition of a boring stock is an 8% share price gain, a dividend yield of 7.4%, and a £300m share buyback, then I will take boring every single time. So, can the momentum continue into 2025?
Acquisition of Direct Line Group
Aviva’s buyout of Direct Line Group (DLG) is likely to be the major driver of the share price throughout 2025 and beyond.
After having been initially rebuffed, an enhanced offer valuing Direct Line at £3.7bn was enough to persuade the board to recommend that shareholders accept the takeover. But is it a good deal for existing Aviva shareholders?
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Business synergies
One clear advantage for existing shareholders, is that it brings together two complementary businesses. Aviva already has 10.1m UK personal lines policies. The acquisition will increase that number to 18.1m.
It will also provide Aviva with growth opportunities through a number of leading brands including Direct Line, Churchill, and Green Flag, as well as pet insurance.
The company has been working on improving its net promoter score for a number of years, through getting even closer to its customer base. The acquisition will strengthen this. For example, the rollout of its in-house car repair business, Solus, is likely to be highly complementary with Direct Line’s auto services and Green Flag roadside assistance.
Merger risks
Any take-over of a competitor creates inherent risks for existing shareholders of the parent company. This makes valuing the new enlarged business trickier in the short to medium term.
Aviva says the transaction will deliver material capital synergies and £125m of incremental run rate cost savings, equally split over the next three years.
Cost savings will come from three main buckets. Merger of back-office functions will remove shared service overheads and lead to a reduction in management roles. Secondly, support services, like call centres, will be combined. And finally, IT systems will be merged.
Each one of these buckets brings with it significant, and potentially unquantifiable, risks. Cultural assimilation will be an undoubted challenge. And as for IT systems, I have lost track of the number of times that previous mergers and acquisitions have not only failed to lead to cost savings there, but materially increased them.
Enhanced shareholder returns
One sweetener for existing Aviva shareholders is that the transaction is likely to lead to enhanced cash distributions.
Given the capital and cash generated from the acquisition, it expects to declare a mid-single digit dividend per share uplift in 2025. This will be applied to the higher share count. In essence, its purpose is to offset share dilution. Going forward, its guidance of mid-single digit growth in the cash cost of the dividend will take effect from this uplifted level.
Over the long term, I am confident the deal will be a good one for shareholders. It has a track record of buying and integrating businesses, including Probitas and Succession Wealth. If I didn’t already have a big holding in the company, I would definitely buy Aviva shares today.
