Prepare for the dance. Aviva is a big grown-up FTSE 100 insurer with a respected chief executive who doesn’t launch takeover offers on a whim; Amanda Blanc will have a strategy to go the distance. Direct Line, on the other hand, is a troubled FTSE 250 insurer with a new-ish chief executive, Adam Winslow, whose turnaround plan has not been applauded wildly by the stock market.
Aviva’s 250p-a-share, or £3.3bn, offer for Direct Line therefore looks to be the opening shot in a negotiation. The target’s board spouted the standard form of words – “highly opportunistic” and a “substantial” undervaluation – but will also know there will be a price at which it will be obliged by its own shareholders to roll over and talk terms. This tussle looks to be about where that price lies. Within a 270p-290p range, one suspects. Aviva starts as a heavy favourite to prevail.
Direct Line’s robust rejection of 250p was still justified. Since the group said no as recently as February to a 233p offer from the Belgian insurer Ageas, any other response would have been odd. But a fellow UK insurer such as Aviva is clearly a more formidable predator when, as with Ageas, the offer comes in a mix of cash and shares, and the bidder’s promise of “material” post-takeover cost savings is greater. As many as a third of Direct Line’s shareholders may already have a slice of Aviva, so should be comfortable with the idea of owning a bit more.
Aviva’s timing also looks sound. Winslow, an ex-Aviva executive as it happens, had to be given a chance to pitch his self-help plan, which he did in the summer. But, if the share price is still stuck in the 150p-180p range – having been 300p-ish before the profit warnings of 2022 and 2023 – the market is saying it expects any recovery to be a long haul.
In those circumstances, the accusation of opportunism carries no sting. Viewed the other way around, Direct Line’s shareholders are being offered the opportunity to take tomorrow’s value today. A near-60% takeover premium (before any improvement in terms) ain’t bad in an insurance market where recovery takes time because you cannot rewrite the premiums on the policies overnight.
One open question is whether the Competition and Markets Authority will have a look. Possibly. In home insurance, the combo could emerge as the biggest player; in motor, market shares move around, but this may be a case of the third- and fourth-largest operators getting together. But does that amount to a meaningful reduction in competitive forces? Possibly not.
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Direct Line’s share price surged 41% to 224p, suggesting the market is confident there’s more bidding action to come. Aviva’s fell 2%, sufficiently small to encourage Blanc to think she hasn’t frightened her own shareholders and can afford to add a few pennies to get the deal done. Nobody is sentimental about insurers, even those such as Direct Line that were pioneers in their day. Prediction: it will all be over by Christmas.