Aviva and Direct Line started this week as two rival UK insurers. They end it as potential spouses.
After three offers from Aviva, the first of which was made public last week, Direct Line’s board accepted on Thursday night. to a £3.6bn takeover with its biggest rival.
If shareholders approve the offer, the acquisition will create a £16bn insurance company that will dominate the UK car and housing markets, with shares of more than 20 per cent and 15 per cent respectively. .
The acquisition is a coup for Aviva, led by Chief Executive Dame Amanda Blanc. At the start of his tenure in 2020, he stated that he would act quickly to achieve his strategic objectives for the FTSE 100 group; managed to divest eight side businesses within a year and a half.
The approach to Direct Line was even faster.
“This whole process took eight days from start to finish, it was very quick – that’s classic Amanda,” said a person close to the Direct Line deal. “He has sold eight businesses in 18 months; “She doesn’t waste time.”
The proposed transaction marks the end of the independence of Direct Linethe insurer formed in 1985 and later spun off from the Royal Bank of Scotland in 2012 in the wake of the financial crisis.
His surrender to Aviva raises questions about the future of Adam Winslow, the former Aviva executive who took the helm of Direct Line in March this year following the departure of Penny James. He resigned in 2023 after a two tumultuous years for the business where it suffered profit warnings and temporarily cut its dividend.
Considered vulnerable to a takeover, earlier this year it fended off two Ageas approachesthe Belgian insurer.
It was in the wake of this failed approach that the seeds of Aviva’s plan were first sown, according to people close to the deal. Aviva had begun to seriously consider Direct Line during the summer months, reaching non-binding proposal of 250 pence per share on November 19.
This came as a surprise to Direct Line’s board of directors, according to people close to the offer.
Aviva had also previously been exploring a potential UK deal. esure insurance company owned by the private equity group Bain Capital. But its interest had cooled in recent weeks as it focused on Direct Line, according to people familiar with the matter.
Blanc was looking for acquisitions to help steer the £13bn business, which has a large life insurance portfolio, into areas with less capital – Direct Line fit the bill. Although struggling in some areas, Direct Line had several well-known brands, such as Churchill and Privilege. Aviva believed there was “material” synergy and capital savings in bringing the groups together.
Meanwhile, Winslow was in the early stages of a turnaround for Direct Line, which was battling a challenging auto insurance market. It had begun assembling a new team and set out a £100m cost-savings plan, but the British group’s depressed share price left it vulnerable.
Aviva first offered 250p per share in mid-November, in a move that valued Direct Line at around £3.3bn. On Nov. 26, Direct Line’s board of directors, led by Danuta Gray, rejected the approach as “substantially.” undervaluing the business and refused to commit. The next day a statement was made to the market.
But Gray met his Aviva counterpart, George Culmer, to explain why the offer was rejected, according to two people familiar with the situation.
Negotiations were largely conducted through the chairmen of the two companies, with some involvement from advisers, as Aviva raised its offer to 261 pence per share on Tuesday.
On Wednesday, Direct Line’s board of directors called an urgent meeting. On Thursday, Bloomberg News published a news report on the improved offer. The board had not yet responded to the latest proposal and the leak forced the timeline to be accelerated. The two sides reached a deal late on Thursday at 275 pence per share.
Direct Line shares closed up 6.5 per cent at 251 pence in London trading on Friday; Earlier this week they had been languishing at around 230p.
But the speed at which Direct Line collapsed has raised eyebrows, even among those close to the deal.
“Why did we have to go through this public bidding dance? Everything was pointing to 275p,” said a person familiar with the deal. “This is how the market works today. “People just want to give the impression that they are getting their pound of flesh.”
Direct Line worked with its bankers at Morgan Stanley, British boutique bank Robey Warshaw and RBC, while Aviva was advised by Citigroup and Goldman Sachs.
Another unusual element of the deal was that Goldman had advised Direct Line in its defense against Ageas earlier this year. A spokesperson for the bank said the company “mutually agreed to end our engagement with Direct Line in the summer.” This allowed him to advise Aviva, for whom he also performs a corporate brokerage role.
The deal has been welcomed by Direct Line’s major investors, who pushed for the board of directors to stand your ground for a better deal than the original 250 pence per share.
“Given the equity component, the 275p price seems acceptable – it would probably have been a different response if it had been a cash offer,” said one of the major shareholders in both Aviva and Direct Line.
“Being willing to accept the offer is not a reflection of DLG’s management; “It is a consequence of the difficult context, the mountain that DLG has to climb, the positive vision of Aviva management and what the combination of the two companies could be worth.”
Another Direct Line shareholder, who is also a major investor in Aviva, said he initially thought Aviva would be able to “hold his nerve” but then became concerned that Direct Line would not be involved.
He added that the second offer of 261 pence was “not enough” when it emerged late on Thursday.
The latest offer of 275p was “enough to see the value from Aviva’s point of view and for Direct Line to accept it”.
The deal has yet to be consummated by Direct Line shareholders (who could still push for more) and is subject to due diligence by Aviva. Aviva has until December 25 to formalize its approach.
Even then, there could be other competitive hurdles to overcome for a combined group that will control more than a fifth of the auto insurance market. Both the Competition and Markets Authority and the Bank of England’s Prudential Regulation Authority are expected to scrutinize the deal.
There is also a delicate question over how the newly expanded team will be integrated, given reports of a strained relationship between Winslow and Blanc, his former boss. “Their working relationship is professional,” said a person close to Aviva.
Still, the deal should net Winslow £1.1m in cash and £1.2m in Aviva shares, or a total of £2.3m, based on his share options as of April 5. according to MKP Advisors.
Direct Line and Aviva declined to comment.
“Aviva has performed every step of the acquisition dance flawlessly,” said Dan Coatsworth of AJ Bell.
With the Christmas deadline approaching, takeover negotiators can only hope that Aviva can close the deal as quickly as it began.