Finance
Aviva set to buy Direct Line to create $21 billion British insurer
Global Banking & Finance Review®
Company
By Yadarisa Shabong and Tommy Reggiori Wilkes
LONDON (Reuters) -British insurer Aviva has agreed to buy smaller rival Direct Line in a sweetened 3.61 billion pound ($4.60 billion) cash-and-stock deal that will create the UK’s largest home and motor insurer.
In a joint statement on Friday, the companies said a preliminary agreement had been reached and that Direct Line was set to recommend a takeover by Aviva if its bigger rival makes a formal offer.
A deal would create a nearly 16.65 billion pound ($21.23 billion) London-listed insurer, bigger than Legal & General and only slightly behind No.1 Prudential in terms of market value.
The transaction would be Aviva CEO Amanda Blanc’s biggest acquisition to date as she tries to expand in core markets of Britain, Canada and Ireland after selling a series of overseas assets to simplify the business and revive its fortunes.
Direct Line also fits with Blanc’s desire to grow in less capital-intensive businesses like motor and home insurance. Aviva in April completed a deal for AIG’s UK life insurance business and in March re-entered the historic Lloyd’s insurance market with a 242 million pound acquisition of insurance platform Probitas.
“This (the Direct Line offer) represents a swift conclusion … at a fair price, which we see as the best possible outcome, as it avoids the need for Aviva to pursue a hostile bid,” Jefferies analyst Philip Kett said in a note to clients.
The combined company would have a more than 20% share in both home and motor insurance in the UK and be “significantly larger” than its next biggest peer, JP Morgan analysts said, although they added that they did not expect any competition concerns from regulators.
The new proposal values Direct Line at 275 pence per share, compared with a 250-pence cash and share bid that was rejected last week triggering speculation among analysts about a bidding war for the motor and home insurer.
Direct Line shareholders would get 129.7 pence in cash and 0.2867 new Aviva shares per Direct Line share, leaving them owning about 12.5% of the combined company.
Shares in Direct Line hit a 2-1/2 year high on Friday and were trading at 253 pence at 0903 GMT, up 7.2%. Aviva stock dipped 0.3%.
LSEG’s data shows that this would be the third-biggest deal for a London-listed company this year after International Paper’s 5.8 billion pound takeover of DS Smith and Thoma Bravo’s deal for Darktrace.
Direct Line’s shares soared more than 40% last week on news of the takeover interest. It had previously rejected a 239-pence-per-share bid from Belgian rival Ageas in June.
According to British takeover rules, Aviva has until Dec. 25 to make a firm offer or walk away.
Direct Line, under CEO Adam Winslow who joined the company from Aviva in March, has made efforts to energise a business hurt by an underperforming motor insurance arm.
“A potential combination of Aviva and Direct Line in UK retail motor insurance and UK house insurance would significantly increase market concentration in these key markets and likely lead to more rational pricing,” Berenberg analyst Michael Huttner said.
($1 = 0.7844 pounds)
(Reporting by Yadarisa Shabong and Aby Jose Koilparambil in Bengaluru and Tommy Reggiori Wilkes and Carolyn Cohn in London. Additional reporting by Yamini Kalia. Editing by Kirsten Donovan and Mark Potter)
An acquisition is a corporate action in which one company purchases most or all of another company's shares to gain control of that company.
Market value is the total worth of a company as determined by the stock market, calculated by multiplying the current share price by the total number of outstanding shares.
A cash-and-stock deal is a type of acquisition where the buyer offers a combination of cash and shares of its own stock to the target company's shareholders.
Insurance market concentration refers to the degree to which a small number of firms dominate the market, affecting competition and pricing.
A takeover is the acquisition of one company by another, which can be friendly or hostile, depending on the target company's acceptance of the offer.
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