Is a Direct Line sale an inevitability?

Well, that came a little out of the blue.

While people seem to be fixated on the potential sale of Esure to suitors such as Allianz, Ageas and Aviva, with all interested parties due to go blow for blow in the new year, the latter goes and pulls a sucker punch.

Aviva has made an effort to take over Direct Line Group in a bid worth around £3.3bn.

Aviva is nothing if not persistent

This was quickly rejected by DLG, saying Aviva was “substantially undervaluing” the company, and said it would not engage further.

DLG shares jumped 40% after the insurer’s latest rejection of a takeover attempt. On 18 November – the day before Aviva’s approach – DLG’s share price stood at £1.56. At the time of writing, it now stands at £2.26, while Aviva’s shares have taken a slight hit, decreasing 3% today since the start of trading.

But Aviva is nothing if not persistent. Could a sale still be on the cards?

Attractive

In Aviva’s statement, it said the company felt “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.

“The acquisition would expand Aviva’s presence in the attractive UK personal lines market, building on its existing strength, and creating a more efficient platform from which to serve existing and new customers.

“In addition, the acquisition would allow Direct Line customers to benefit from Aviva’s breadth, scale and financial strength.

“An acquisition would deliver attractive returns for both Aviva and Direct Line shareholders, including unlocking value that is inaccessible to Direct Line standalone.

“Aviva believes that the acquisition would deliver material cost and capital synergies, incremental to Direct Line’s existing cost savings programme.”

Aviva also stated shareholders would be able to participate in the upside in Aviva shares “as well as the benefits of the combination”.

Undervalued

However, DLG stated it has “considerable conviction in the capabilities” of its newly established leadership team and “stands firmly behind their delivery” of its strategy.

While this may feel as though the firm is happy to be the maker of its own turnaround, there must be some shareholders looking at potentially getting out now and cutting losses, rather than waiting for the turnaround to be complete, which could be a few years.

In Aviva’s statement, it said: “The proposal represents total consideration valued at 250 pence per share.”

This is 13 pence per share more than the second bid from Ageas back in March that it rejected.

Both bids were rejected unanimously by the DLG board and shareholders. However, experts from investment bank Peel Hunt labelled the offer as “reasonable”, and even suggested it might be closer to an accepted bid than is being reported.

Andreas Van Embden said the offer was “c19% above our 210p target price”.

Analysts at Panmure Gordon also said an offer at around 250p per share or slightly above is “good for DLG shareholders”.

But Van Embden said there is “scope to sweeten the bid to £2.60 to £2.65”.

Could Aviva be tempted to increase its offer to this? And could this be enough to persuade DLG shareholders to engage, or even possibly accept?

Aviva has until Christmas Day (25 December) to make a firm offer, but it would appear this latest saga is far from over yet.