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Leading Direct Line shareholders are holding out for a higher takeover offer from Aviva after the insurer rejected a £3.3bn proposal from its larger rival.
Several key investors in Direct Line, best known for its motor cover and mascot of a red phone on wheels, have told the Financial Times they supported the board’s decision to dismiss Aviva’s 250p a share proposal as “highly opportunistic” and “substantially” too low.
Direct Line shareholders who spoke with the FT said they backed the board’s decision to not engage with Aviva because the deal undervalued the company.
“250p is nowhere near the right price,” said one top 30 investor. “I think the Direct Line board has done the right thing [ . . . ] You only engage if there’s a proper offer on the table.”
A top 10 Aviva shareholder, who also has a holding in Direct Line, said they would expect the latter’s board to engage only if the offer price were increased above 250p.
The fund manager said that Aviva could also increase its equity portion if it improved the offer, “so if it’s not at the price Aviva wants, at least they have more participation”.
A third top Direct Line shareholder said they were “still monitoring the situation” but added they were so far supportive of Direct Line’s strategy of not yet engaging.
The shareholders’ comments come despite a charm offensive from Aviva, which in recent days has contacted Direct Line investors in an attempt to persuade them of the merits of its “highly attractive” proposal; a move that could pave the way for a hostile bid.
For his part, Direct Line boss Adam Winslow has appealed to investors to give him more time to turn around the struggling insurer, whose depressed share price has made it vulnerable to takeovers. Winslow — himself a former Aviva executive — told the Sunday Times that the company was making “excellent progress in the early stages of a significant turnaround.”
Aviva’s non-binding proposal, first made on November 19, was a 57.5 per cent premium to Direct Line’s closing price of 157.8p on November 27, the day the non-binding approach was disclosed.
Shares in Direct Line have since November 28 traded at around 230p, or 20p below Aviva’s approach price. Direct Line shares closed up at 236.8p in London trading on Wednesday.
Aviva has until December 25 to make a formal bid or walk away from a deal.
A combination of Aviva and Direct Line would create an insurance group with more than a fifth of the motor market and about 15 per cent of the home insurance segment, according to research by MKP Advisors.
The Aviva offer was the third takeover bid Direct Line has received this year, having rebuffed two approaches from Belgian insurer Ageas. Aviva’s offer was just over 7 per cent above Ageas’s first offer and 5.4 per cent above the second.
Berenberg analysts said they believed Aviva has “ample capacity” to raise its bid, forecasting an improved proposal of 275p.
Aviva declined to comment on the investor views.
Analysts said Direct Line’s share price continuing to trade below the 250p possible offer price was the market’s way of saying that Aviva would fail to secure the deal unless it “digs deeper”.
“We’re in a holding pattern until someone makes the next move, whether that’s Aviva or another party trying their luck to buy Direct Line,” said Dan Coatsworth, investment analyst at AJ Bell.
“It’s increasingly rare for someone to win with their first bid, and it seems clear that Direct Line’s board isn’t budging until Aviva increases its offer by a fair amount.”
