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Aviva, the UK insurance heavyweight, has agreed a £3.6bn takeover deal with Direct Line, after winning over its smaller rival with a sweetened bid.
The preliminary deal, announced in a joint statement by the companies on Friday, will see Aviva pay 275p per share for the motor insurer best known for its mascot of a red phone on wheels.
The price is about a 10 per cent increase on the FTSE 100 group’s initial 250p approach in November, which consisted of cash and shares. The Direct Line board dismissed that bid as “highly opportunistic”.
Direct Line shares rose as much as 7.7 per cent to 254p in early trading.
The deal will create a powerhouse in UK motor insurance, where the combined group is estimated to have more than a fifth of the market and a market cap of about £16.6bn.
Aviva moved quickly after its initial bid was dismissed by Direct Line’s board as “significantly undervaluing” the 40-year-old group. It went directly to Direct Line’s investors to persuade them to back its approach, which Aviva had said would be “highly compelling” for shareholders of both companies.
Analysts said the pace at which Aviva acted to win over Direct Line had helped avoid a hostile bid.
“This represents a swift conclusion to the situation at a fair price, which we see as the best possible outcome as it avoids the need for Aviva to pursue a hostile bid,” said Jefferies, in a note published this morning.
The latest offer would see Aviva pay 129.7p in cash, and 0.2867 of its own shares for each Direct Line share. Direct Line shareholders would also receive a 5p-per-share dividend before completion.
Shareholders in Direct Line, whose stable of brands includes Churchill and Green Flag, would own approximately 12.5 per cent of the issued and to be issued share capital of Aviva.
After consulting with advisers and shareholders, Direct Line’s board would be “minded to recommend” the deal to the group’s shareholders, said the companies in their joint statement.
“The Direct Line board believes that, in addition to the attractive headline value per share, the combination would provide the opportunity to deliver significant synergies, creating substantial additional value for both sets of shareholders,” they added.
In its initial approach, details of which were disclosed last month, Aviva said it believed that an acquisition of Direct Line would be consistent with its strategy to accelerate growth in its UK businesses and further pivot the group towards capital-light business lines.
Aviva has until December 25 to make a firm offer and Direct Line shareholders would have to vote on any deal.
Direct Line chief executive Adam Winslow, a former Aviva executive, is in the early stages of a transformation for the struggling insurer, whose depressed share price had seen it vulnerable to takeover bids.
The companies’ statement added that the board of Direct Line remained “confident in Direct Line’s prospects as a standalone company and continues to have conviction in the capabilities of the newly established leadership team to deliver the announced strategy”.
Some analysts believe the deal is likely to attract attention from competition authorities because the combined group would have more than a 20 per cent share in the UK motor insurance market.
