Direct Line shares surge after £3.3bn Aviva takeover approach

Shares in Direct Line surged as much as 42 per cent on Thursday morning after the insurer rejected a £3.3bn takeover approach from larger rival Aviva.

FTSE 250-listed Direct Line was thrust into the takeover spotlight on Wednesday evening after confirming Aviva had made a proposal on 19 November.

Direct Line’s board unanimously rejected the offer, saying it was “highly opportunistic and substantially undervalued the company”.

Aviva’s rejected 250p bid was split half as cash and half as shares. Direct Line’s share price is currently trading at around 224p, from 159p at Wednesday’s close, suggesting investors are preparing for a higher offer or counter-bid.

Aviva’s share price dropped as much as 3.4 per cent in early trading, making it the biggest faller on the FTSE 100 on Thursday morning.

Britain’s biggest insurer, Aviva is the second suitor Direct Line has rebuffed so far this year after receiving two takeover offers from Belgian rival Ageas in March – the second valuing it at £3.2bn.

Aviva said it believed acquiring Direct Line would align with its strategy to accelerate growth in the UK market and pivot towards capital-light business lines.

“Direct Line is playing hard to get, again,” said Matt Britzman, an analyst at Hargreaves Lansdown.

“There’s a case to be made that Aviva is a better suiter, given it already shares markets with Direct Line in the UK, but it’ll need to up its game – and its offer – if it wants Direct Line to take the proposal seriously.”

Under CEO Amanda Blanc, Aviva has offloaded several businesses in Europe and Asia in recent years to refocus on its home market.

It returned to the Lloyd’s of London marketplace earlier this year through the £242m purchase of Probitas.

“We believe this is a reasonable offer, which captures Direct Line’s excess capital and discounts a turnaround in Direct Line’s profitability in the next two years,” said Andreas Van Embden, an analyst at Peel Hunt.

The investment bank said “there is scope to sweeten the bid” to between 260p and 265p.

Analysts at Stifel-owned KBW said they could see Aviva making an offer of around 300p.

“We are always cautious about the bidder’s curse, but we believe Aviva’s approach to Direct Line is strategically coherent, could offer considerable synergies, and is currently highly financially attractive,” they added.

Rhea Shah, an analyst at Deutsche Bank, said the approach added “confidence to the UK personal lines space” and that a tie-up could create “bottom-line synergies for Aviva, even if this could put pressure on its 2025 buyback”.

After firing out two profit warnings in two years, Direct Line is embarking on a turnaround plan led by chief executive Adam Winslow, who joined the firm from Aviva in March.

Earlier this month, it laid out plans to cut 550 jobs as part of a strategy to save £50m next year. Direct Line lost almost 400,000 customers last quarter compared to a year earlier after hiking its prices.

“The downside risk to Direct Line’s standalone strategy of delivering cost savings and switching the Direct Line brand to price comparison websites has increased in our view,” Van Embden said.

“As such, engaging with Aviva to fully explore their offer in more detail would make sense in our view.”

Under UK takeover rules, Aviva has until 5pm on 25 December to either announce a firm offer for Direct Line or walk away.