Aviva and Direct Line have announced that they have reached a preliminary agreement on the financial terms of a potential acquisition of Direct Line’s entire share capital by Aviva.
This newly agreed deal represents a total consideration valued at 275 pence per Direct Line share (£3.6bn), an increase from the 250 pence per share offer made on November 19 2024, which Direct Line had rejected, stating it did not adequately reflect the company’s standalone value.
The deal also represents a premium of 73.3% to the closing Direct Line share price on 27 November 2024 and 49.7% to the six-month volume-weighted average Direct Line share price on 27 November 2024.
After thorough deliberation with its advisers and consultation with shareholders during the offer period, the Direct Line Board has determined that the deal’s valuation is one it would be inclined to recommend to shareholders, provided a formal offer under Rule 2.7 of the Code is announced on such financial terms, subject to the agreement on all other terms and conditions of the offer and the completion of customary reciprocal due diligence.
Direct Line shareholders would reportedly own approximately 12.5% of the issued and to be issued share capital of Aviva.
“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,” Direct Line said in the joint statement.
In its rationale for the initial offer, Aviva stated that acquiring Direct Line would deliver attractive returns for both Aviva and Direct Line shareholders, including unlocking value that Direct Line could not achieve on a standalone basis.
Additionally, Aviva stated that the acquisition would generate significant cost and capital synergies, building on Direct Line’s existing cost-savings program.
The rating agency noted that acquiring Direct Line would accelerate Aviva’s strategy of shifting its business mix towards capital-light products, thereby strengthening its return on equity.
From Direct Line’s perspective, Moody’s said the main benefit of an acquisition by Aviva would be support from a larger, more diversified parent group with better credit quality.
“Direct Line’s high profile brands and good market position would also reinforce Aviva’s already strong UK franchise, although its dependence on the UK would increase,” Moody’s analysts added.
UK investment bank Peel Hunt also responded to the news, writing that the combination of Aviva and Direct Line would further strengthen Aviva’s position in the UK personal lines market and take its market share in UK Motor to 22% at a time when Motor rates are starting to peak and regulators are again reviewing underwriting practices in the UK Motor market.
