Direct Line agrees £3.7bn Aviva takeover ahead of Christmas deadline

Aviva has finally struck a deal to acquire fellow insurer Direct Line for £3.7billion, ahead of a Christmas Day deadline.

Britain’s largest life insurer made a £3.3billion approach in November, but Direct Line turned this down on the grounds that it ‘substantially undervalued’ the company.

Having had until 5pm on Christmas Day to agree a concrete proposal, Direct Line’s board said it would support the higher bid.

It has now accepted an offer whereby Direct Line investors will receive 0.2867 new Aviva shares, 129.7 pence in cash and a dividend of up to 5p per share for every Direct Line share they hold.

This represents a 73.5 per cent premium to Direct Line’s closing share price on 27 November, the last day prior to the offer period starting.

Once the deal is finalised, Aviva investors will own about 87.5 per cent of the enlarged business, while Direct Line shareholders will hold the remaining 12.5 per cent.

Aviva believes the takeover will bolster its presence in the UK personal lines market, which generated at least £26billion of gross written premiums last year.

The FTSE 100 group also expects it to create ‘better outcomes’ for customers, such as competitive pricing, greater technology investment and faster claims payments.

Since Dame Amanda Blanc became Aviva’s chief executive in 2020, the company has sought to simplify operations by focusing on its core markets: the UK, Canada and the Republic of Ireland.

At the same time, Aviva has delivered significant payouts for its shareholders, which were funded by selling some international divisions, and selectively pursued takeover deals.

Blanc said the Direct Line deal ‘builds on our track record of delivering four years of strong financial performance and, in line with our strategy, it accelerates our growth in capital-light business’.

Direct Line rejected numerous takeover offers earlier this year from Belgian insurance giant Ageas, with the most recent valuing the business at £3.2billion.

Ageas first approached the firm just before Adam Winslow took over from Penny James as Direct Line’s chief executive in March, having previously been head of Aviva’s UK and Ireland insurance operations.

Under James, Direct Line struggled with inflation and supply chain issues increasing motor repair costs, and new rules preventing insurance firms from ‘price walking’ – imposing higher premiums on loyal customers.

Winslow is spearheading a turnaround strategy at Direct Line that includes growing policy sales and a £100million cost-cutting programme.

His actions appear to be paying off, with the company reporting a £61.6million pre-tax profit for the first six months of 2024, compared to a £76.3million over the same period last year.

Yet Direct Line bosses said the firm’s share price and valuation were not ‘appropriately reflecting the potential for the business,’ pointing to the group’s shares closing at a 12-month low prior to Aviva’s initial proposal.

Danuta Gray, its chair, said: ‘Direct Line is in the early stages of an extensive turnaround, and it believes the offer allows Direct Line shareholders to realise the value of their investment in the near term.’

Direct Line Insurance Group shares were 2.8 per cent higher at 250p on Monday morning. Aviva shares were 0.1 per cent down at 456.6p.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: ‘While the new management team has been working to steady the vessel, even they couldn’t deny that Aviva’s offer was the golden ticket they’d struggle to replicate on their own.

‘Though they’ve expressed confidence in their independent strategy, this proposal was simply too compelling to pass up.’