After Aviva PLC’s (LSE:AV.) £3.3 billion takeover bid for Direct Line Insurance Group PLC (LSE:DLG) was rejected, another bid is a “distinct possibility”, according to analysts.
The pair confirmed that an indicative cash and shares offer had been made, following press speculation, made up of 112.5p cash plus 0.282 new Aviva shares.
Based on Aviva’s share price at 488p on 18 November, where they roughly remained yesterday, this made the offer worth 250p per Direct Line share, with a total cost to Aviva of £3.28 billion.
Direct Line, as it did with a 239p per share bid from Belgian giant Ageas earlier this year, rejected the offer as “opportunistic”, giving Aviva until 25 December to make a firm offer.
At 250p, the offer price represents around 12 times DLG’s forecast 2025 earnings, which “is a good offer”, analyst Abid Hussain at Panmure Liberum said, and DLG shareholders “would do well to accept” given the near 60% premium and the risk around their own turnaround.
“DLG shareholders would need to believe that normalised earnings are at least circa 30% higher in order to reject this offer,” Hussian added.
“Given the degree of overlapping business, the expense and capital synergies will be significant, meaning Aviva may have room to offer a slightly higher amount.”
If the DLG shares bounce towards 250p today, Hussain said he believed shareholders “should consider easing their holdings whilst still maintaining an interest in case of a higher bid emerging on later.
“Whilst we cannot rule out a bidding war for DLG we think it unlikely but a higher offer emerging from Aviva remains a distinct possibility.”
Deutsche Bank analyst Rhea Shah said: “We see this as adding confidence to the UK personal lines space, and can see bottom-line synergies for Aviva, even if this could put pressure on its 2025 buyback.”
Andreas Van Embden at Peel Hunt said Aviva “could be persuaded to sweeten the deal” to somewhere around 260-265p, “which may help satisfy the DLG board”.
But his initial view is that the offer is “reasonable” and DLG’s rejection reflects the board’s confidence in the company’s standalone outlook he believes “engaging with Aviva would make sense”.