Christmas bid battle brewing for Direct Line after the insurer rejects shock £3.3bn takeover supply from rival Aviva

Direct Line shares soared yesterday after a shock £3.3billion takeover offer from rival Aviva raised the prospect of a Yuletide bidding war for the troubled insurer.

The stock soared by 41.4 per cent, or 65.7p, to 224.4p, an eight-month high, as traders reacted to the disclosure that it had rejected an approach.

One investor said Aviva may have to go up to £3.9billion to get the deal over the line amid speculation that Belgian insurer Ageas, a previous suitor, could re-enter the fray.

Aviva is now directly contacting shareholders in an apparent attempt to pave the way for a hostile takeover.

It came as a flurry of deal activity engulfed the City, with cafe bar group Loungers accepting a £338million offer from US investment group Fortress and waste management firm Renewi succumbing to a £701million bid from Australian bank Macquarie. 

‘Takeover activity was red-hot on the UK market,’ said Dan Coatsworth, investment analyst at AJ Bell.

Direct Line stock soared by 41% after the insurer, led by boss Adam Winslow, (right) had rejected an approach from rival Aviva, led by Amanda Blanc (left

Aviva’s 250p-a-share offer, comprising a mix of cash and stock, was disclosed late on Wednesday. 

That was at a premium of nearly 60 per cent to Direct Line’s share price. Aviva said it was ‘highly attractive’ but Direct Line said it was ‘highly opportunistic and substantially undervalued the company’.

Under ‘put up or shut up’ takeover rules, Aviva now has until 5pm on Christmas Day to announce a firm bid or walk away. Aviva said that after the rejection of its offer this week, Direct Line had ‘declined to engage further’ with it.

However, it emerged that Aviva chair George Culmer met Direct Line chair Danuta Gray to discuss the offer, appearing to suggest that the latter was open to a deal of some sort.

Yesterday, Direct Line’s management was in talks with shareholders. Some, including Redwheel and Schroders, are also major investors in Aviva.

One top-20 shareholder in the target company told the Financial Times that most investors would probably accept a bid at 300p. Analysts at investment bank KBW also suggested Aviva could make a 300p valuation.

Analysts at Peel Hunt put a lower target on it, suggesting that if Aviva was able to ‘sweeten the deal’ to something like 250p-265p that may ‘help satisfy’ the Direct Line board. 

‘They said that struggling Direct Line’s turnaround path may prove ‘bumpier than anticipated’, adding that exploring Aviva’s offer ‘in more detail would make sense in our view’.

Aviva’s approach is the second takeover offer that Direct Line boss Adam Winslow has had to deal with since taking over this spring. It rejected a 239p-a-share approach from Ageas in March.

Analysts at Barclays yesterday suggested Ageas could now come back. ‘In our recent conversations with Ageas management, the CEO has reiterated strategic interest to the UK personal lines (home and motor) market, including Direct Line as a fitting asset, although clearly ruling out a hostile approach,’ they said in a note.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said Direct Line was ‘playing hard to get again’.

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