Direct Line shares surge 42% after rejecting £3.3bn Aviva takeover offer

Direct Line, the FTSE 250-listed insurer, saw its shares surge by as much as 42% on Thursday morning after it turned down a £3.3bn takeover bid from larger competitor Aviva. The proposal, which was made on 19 November, was unanimously rejected by Direct Line's board, who described it as "highly opportunistic and substantially undervalued the company".

Aviva's unsuccessful 250p offer was divided equally between cash and shares. Currently, Direct Line's share price is trading at around 224p, up from 159p at Wednesday’s close, indicating that investors are anticipating a higher offer or counter-bid, as reported by City AM.

Meanwhile, Aviva's share price fell by as much as 3.4% in early trading, making it the biggest faller on the FTSE 100 on Thursday morning. Aviva, the UK's largest insurer, is the second company that Direct Line has fended off this year, having previously received two takeover offers from Belgian rival Ageas in March – the second valuing it at £3.2bn.

Aviva stated that acquiring Direct Line would be in line with its strategy to boost growth in the UK market and shift towards capital-light business lines.

"Direct Line is playing hard to get, again," commented Matt Britzman, an analyst at Hargreaves Lansdown.

"There’s a case to be made that Aviva is a better suiter, given it already shares markets with Direct Line in the UK, but it’ll need to up its game – and its offer – if it wants Direct Line to take the proposal seriously."

Under the leadership of CEO Amanda Blanc, Aviva has been shedding several businesses in Europe and Asia over recent years to refocus on its domestic market. It marked its return to the Lloyd’s of London marketplace earlier this year through the £242m acquisition of Probitas.

"We believe this is a reasonable offer, which captures Direct Line’s excess capital and discounts a turnaround in Direct Line’s profitability in the next two years," commented Andreas Van Embden, an analyst at Peel Hunt. The investment bank suggested "there is scope to sweeten the bid" to between 260p and 265p.

Analysts at Stifel-owned KBW envisage Aviva making an offer of around 300p. "We are always cautious about the bidder’s curse, but we believe Aviva’s approach to Direct Line is strategically coherent, could offer considerable synergies, and is currently highly financially attractive," they added.

Rhea Shah, an analyst at Deutsche Bank, said the approach added "confidence to the UK personal lines space" and that a merger could generate "bottom-line synergies for Aviva, even if this could put pressure on its 2025 buyback". After issuing two profit warnings in two years, Direct Line is embarking on a recovery plan led by CEO Adam Winslow, who joined the firm from Aviva in March.

Earlier in the month, Direct Line revealed plans to eliminate 550 jobs as a measure to save £50m in the coming year. The insurer saw a drop of nearly 400,000 customers in the last quarter compared with the previous year, this following a decision to raise its prices.

"The downside 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," remarked Van Embden. "As such, engaging with Aviva to fully explore their offer in more detail would make sense in our view."