Bidding war in prospect after Aviva’s £3.3bn bid to buy Direct Line

The £3.3 billion takeover approach from Aviva for its rival Direct Line has sparked speculation of a bidding war, lifting shares in Britain’s embattled number three car insurer by more than 40 per cent.
Direct Line has already rebuffed the bid, but its shares were up by 41.4 per cent, or 65¾p, to close at 224½p as traders bet on a second approach from Aviva, or an approach from a third party.
Aviva and its advisers at Goldman Sachs and Citigroup were understood to be approaching Direct Line shareholders directly to gauge their views on its approach, amid speculation it could launch a hostile bid or raise its cash and shares offer.
Separately, investment bankers at Bank of America were understood to be re-examining the numbers for its client Ageas, the Belgian insurer that bid for Direct Line earlier this year.In other developments:
⬤ Concerns were raised for the jobs of Direct Line’s 10,000 people in Bromley, Glasgow, Leeds, Doncaster, Birmingham and Bristol amid expectations that Aviva might move quickly to cut out duplicated functions from any merger.
⬤ The Fidelity investment group emerged as the kingmaker in any bid battle after London-based Fidelity International and its sister US firm Fidelity Investments jointly declared a 14.5 per cent stake in Direct Line.
⬤ Analysts predicted that Aviva could stretch to a higher bid price for Direct Line, with Jefferies suggesting it might have to add £260 million to its existing offer to bring the Direct Line board to the negotiating table.
Ageas approached Direct Line with a £3.2 billion bid earlier this year but its offer was deemed “unattractive” by the board. However, the rise since then in the Belgian group’s share price, which has climbed from €41.45 to €47.98, could give the group more firepower for a cash-and-shares counter to Aviva’s bid.
Analysts at Barclays said: “In our 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.”
BNP Paribas, the French investment bank, acquired a 9 per cent stake in Ageas from Fosun, the Chinese conglomerate, in April, bringing its total holding to more than 10 per cent, which Barclays’ analysts said may have set the stage for “stronger support for M&A by the largest shareholders”.
The bank’s analysts added that shareholders in the UK may prefer Aviva, as its shares are denominated in sterling, and trade more readily than those of Ageas.
A takeover could lift Aviva’s operating earnings by around 7 per cent and produce a group with combined earnings of £1.7 billion, according to analysts, and the merged entity is tipped to be capable of delivering operating earnings of £2.2 billion in 2029.
The two companies may be able to produce cost savings through a combination of their car repair networks. Direct Line owns 23 garages and Aviva operates the Solus chain of around 24 garages. Barclays estimated Aviva could deliver synergies of up to £255 million, representing 8 per cent of the total value of the deal.
It has been estimated that Aviva would need to issue around 366 million new shares to secure a deal and may be able to increase the stock component of its offer by another 200 million shares without diluting its current shareholders, which would deliver a value increase of £1 billion.
Aviva reported it had liquidity of £1.7 billion at the end of October, and having already put forward a cash component of 112.5p-per-share in its first bid, which would cost the group £1.5 billion, analysts said the insurer may not increase the cash on offer to Direct Line’s shareholders as this would “entirely deplete their cash reserves”.
Analysts at Peel Hunt said Aviva had made a “reasonable offer” and reflected Direct Line’s excess capital levels.
They said: “Despite Direct Line’s healthy capital position, there are some recent cycle and regulatory headwinds which suggest the recovery could be bumpier than anticipated.
“The risk to Direct Line’s standalone strategy of delivering cost savings and switching the Direct Line brand to price comparison websites has increased in our view. As such, engaging with Aviva to fully explore their offer in more detail would make sense.”