How Aviva and Ageas could go head-to-head in Direct Line bidding war

The City is braced for a Direct Line bidding war after Aviva threw the company into the takeover spotlight for the second time this year with a £3.3bn approach.

The FTSE 100 insurer is understood to have begun reaching out to shareholders in its smaller rival over the past two days, fuelling speculation that Aviva could mount a hostile takeover attempt after Direct Line rejected its initial proposal on Wednesday.

Meanwhile, analysts have raised the possibility of a counter-bid from Belgian insurer Ageas, which remains on the lookout for UK takeover targets after Direct Line rejected two cash and share offers in March.

Direct Line’s board unanmiously rejected Aviva’s 250p cash and share proposal on Tuesday, calling it “highly opportunistic”.

The company’s stock price has surged since then to around 231p on news of Aviva’s approach, suggesting its investors expect a raised offer or counter-bid from a third party.

Aviva’s initial proposal would have cost the firm £1.5bn in cash, almost entirely depleting the £1.7bn of liquidity it reported at the end of October. However, analysts have argued that Aviva still has room to raise the share component of its proposal and make a higher offer.

KBW analyst William Hawkins said Aviva’s offer ceiling could exceed 300p, given the “huge synergy potential” of a deal.

Analysts at Barclays estimated that a takeover could boost Aviva’s operating earnings by around seven per cent, while the combined group could deliver £2.23bn of earnings in 2029.

A takeover would also reunite much of Direct Line’s leadership with their former boss Amanda Blanc. Direct Line’s CEO, CFO, COO and chief risk officer have all recently joined from Aviva.

Aviva’s price tag marked a 58 per cent premium to Direct Line’s last share price before the offer period. Analysts at JP Morgan said they thought the potential premium offered by Aviva or Ageas “would be very attractive” to the FTSE 250 firm’s shareholders.

Barclays analysts also argued the valuation and structure of the deal was “attractive”, including the fact that Aviva’s shares are denominated in sterling unlike Ageas’s.

They said it was likely that Direct Line’s board would ultimately engage with Aviva in the case of an improved offer “or another participant like Ageas”.

Investment bankers working for the Belgian giant are reportedly re-examining their numbers around Direct Line. Ageas is the UK’s sixth-largest car insurer and employs some 2,600 staff across the country.

Chief executive Hans de Cuyper said last month that Ageas was open to making further takeover bids for British companies. A company spokesperson declined to comment on Friday when asked by City AM whether it was readying a fresh bid for Direct Line.

Analysts at Barclays said that in their “recent conversations with Ageas management, the chief executive has reiterated strategic interest to the UK personal lines market, including Direct Line as a fitting asset, although clearly ruling out a hostile approach”.

KBW analyst Hawkins added that an Aviva takeover would come with a presumed “high risk” of job cuts for Direct Line’s 10,000 staff, giving “a strong incentive for every individual in Direct Line to seek an owner who can help the business grow, not die”.

“This is a hostile situation,” he said, pointing to the fact that politicians and regulators would likely face questions over the integration of the businesses.

“Whilst insurers do not like to go hostile on targets, Direct Line finding a white knight would leave Aviva in the unenviable position of being the bad guy in the corporate insurance world.”

Still, he argued that many large potential counter-bidders might see better M&A opportunities outside the UK.