UK Insurance Firms Aviva and Direct Line Merger Likely

Two UK insurance firms – Aviva and Direct Line – on Friday announced that they have reached preliminary agreement on the financial terms of a potential acquisition of the entire share capital of Direct Line by Aviva.

If the deal is completed, it will be one of the biggest mergers in the UK’s insurance sector, as the Kent-based Direct Line agreed to accept an improved offer from the UK’s largest insurer Aviva, in a deal valuing the business at $4.6 billion.

Aviva said that it has reached a preliminary agreement to take over Direct Line after submitting a third cash and shares bid valuing London-listed Direct Line at $3.5 per share.

If the deal is cleared by the competent authorities, it will create a $21.23 billion insurance firm in the UK, which will be second, after Prudential Insurance, in terms of market value but bigger than Legal & General firm.

Aviva had made its first offer at $3.18 per share last week but Direct Line’s Board led by its Chair Danuta Gray rejected the offer saying that it was high opportunistic and substantially undervalued the business.

In a statement on Friday, board of Direct Line said it remained confident in its prospects as a standalone company and continued to have the conviction and capabilities of the newly established leadership team to deliver the announced strategy.

Recommending to Shareholders

“That said, the board of Direct Line has carefully considered the proposal with its advisers and consulted with Direct Line shareholders during the offer period, and has concluded that the proposal is at a value that it would be minded to recommend to Direct Line shareholders should a firm intention to make an offer,” Direct Line said.

Direct Line shareholders would own approximately 12.5% of the issued and to be issued share capital of Aviva. The Direct Line Board believes that, in addition to the attractive headline value per share, the combination would provide the opportunity to deliver significant synergies, creating substantial additional value for both sets of shareholders.

The merger of Direct Line with Aviva, would create a group dominating more than a fifth of the motor insurance market and 15% of the home sector. Direct line almost lost 400,000 car insurance customers in the past year.

Under City takeover rules, Aviva has until 5 pm on Christmas Day to table a firm offer for Direct Line or walk away. The deal is likely to draw scrutiny from the competition watchdog and insurance supervisors at the Bank of England.

Benefits to Both

Meanwhile, analysts at Moody’s Ratings have suggested that the potential acquisition of Direct Line by Aviva could bring credit positive benefits to both firms.

In a report early this week, Moody’s said that an acquisition of Direct Line would accelerate Aviva’s strategy of shifting its business mix towards capital-light products, thereby strengthening its return on equity.

“Direct Line’s high profile brands and good market position would also reinforce Aviva’s already strong UK franchise, although its dependence on the UK would increase,” Moody’s analysts explained.