The gloves have come off in the UK insurance industry as Aviva fired the opening shot in what is expected to be a high-stakes bidding war for troubled rival Direct Line. Aviva’s unsolicited £3.3 billion all-share offer, valuing Direct Line at 250 pence per share, represents a nearly 60% premium to the target’s recent trading range. But few expect this to be the final word.
Aviva Plays Offense as Direct Line Struggles
Aviva, a FTSE 100 insurance powerhouse, clearly sees an opportunity to pounce with its smaller peer on the ropes. Direct Line, once a pioneer in its field, has stumbled badly in recent years, issuing a string of profit warnings that cratered its share price from around 300p in early 2022 to the 150p-180p range before Aviva’s bid.
Aviva CEO Amanda Blanc seems to be betting that her company’s heft, along with the promised “material” cost savings from combining the two insurers, will prove persuasive to Direct Line shareholders. Many of them likely own Aviva shares already and may be receptive to taking on more.
Direct Line Digs In, But for How Long?
Unsurprisingly, Direct Line’s board called the 250p offer “highly opportunistic” and a “substantial undervaluation.” But that forceful rejection rings a bit hollow considering Direct Line rebuffed a 233p bid just months ago from Belgian insurer Ageas, only to see its shares continue to languish.
New CEO Adam Winslow, himself an Aviva alum, has pitched a turnaround plan for Direct Line. But judging by the market reaction, few seem willing to bet on that over the immediate 60% gain from accepting Aviva’s terms.
“Viewed the other way around, Direct Line’s shareholders are being offered the opportunity to take tomorrow’s value today,” noted a London-based insurance analyst.
Investors Expect More Bidding to Come
Direct Line shares surged over 40% to 224p on news of Aviva’s offer, still shy of the 250p bid price. This suggests investors see Aviva’s approach as merely an opening gambit and expect the company may have to sweeten the pot to seal the deal.
Meanwhile, Aviva’s shares dipped only modestly, indicating shareholders are not overly concerned about the company overpaying at this point. CEO Blanc appears to have room to boost the offer if needed to bring Direct Line to the table.
Little Room for Sentiment in Consolidating Industry
Aviva’s move on Direct Line underscores the cold, hard realities of a rapidly consolidating insurance industry where scale is king. Even former trailblazers like Direct Line, which pioneered telephone- and internet-based insurance sales, garner little sentiment once they fall on hard times.
“The market is not sentimental,” lamented an industry veteran. “Below a certain size, you’re either predator or prey, and Direct Line now knows which role it occupies.”
Most observers believe it’s just a matter of Aviva and Direct Line agreeing on price, likely in the 270p-290p per share range that would value Direct Line equity upwards of £3.6 billion. The deal could be wrapped up before the December holidays.
Competitive and Regulatory Challenges Loom
An Aviva-Direct Line combination would create the UK’s largest home insurer and a top-3 player in the auto insurance market. That is sure to draw close scrutiny from the Competition and Markets Authority.
However, the fragmented nature of UK insurance means the CMA may well stop short of blocking the deal outright. The combined company would still face robust competition from a host of domestic and international rivals.
The larger challenge may be integrating the two companies and delivering the promised synergies. Aviva will also have its hands full turning around Direct Line’s underwriting performance so it doesn’t dilute group profitability.
More Deals Likely to Follow
Should Aviva prevail in its pursuit of Direct Line, competitors will likely be spurred to pursue their own deals to keep pace. Other sub-scale insurers may conclude they are better off joining forces than risking irrelevance.
“The race for scale is truly on now,” predicted one industry consultant. “Aviva consolidating Direct Line would redraw battle lines and force others to respond.”
With the Aviva-Direct Line tussle seen as a harbinger of things to come, UK insurance M&A activity is poised to accelerate through the end of 2024 and beyond. While some lament the loss of an innovative upstart like Direct Line, its widely anticipated absorption into a larger rival reflects the industry’s new reality.
