IE OPINION:
It’s no secret that Direct Line has had a tough time of late, plus the FCA may yet take further action over allegations of unfair valautions on written-off vehicles in the past. Whatever the outcome, it’s a brave move from Aviva to consider taking on another insurance brand, even if economies of scale can be made between the two brands.
As the MSM has reported today, Direct Line has rejected the 250p per share offer as `unrealistic’ but stating in public that negotiations have ceased seems a tad rash. Previous bidder Ageas might not raise their offer significantly and who else would be interested in taking on a brand that could have a 2-3 year reputational bridge to build with its UK motor book policyholders – insurance is all about trust in the end.
MORNINGSTAR COMMENT
“Aviva’s offer is a good fit—both companies are UK-based, and Aviva has been focusing on growing its non-life segment. The offer exceeds fair value estimates for Direct Line, and given the challenging targets outlined during the Capital Markets Day, accepting this deal, or a higher one, from Aviva makes sense.” – Henry Heathfield, Equity Analyst at Morningstar
PEEL HUNT ANALYSIS
· Aviva has made a non-binding offer for DLG at 250.5p per DLG share in cash and Aviva shares.
· The offer is reasonable, in our view, discounts DLG’s full recovery potential, and includes a bid premium in our view.
· The rejection of Aviva’s proposal reflects the board’s confidence in DLG’s standalone outlook but we still believe engaging with Aviva makes sense.
Aviva could be persuaded to sweeten the deal to 260p-265p, which may help satisfy the DLG board. There is downside risk to DLG’s standalone strategy and retaining some upside in an Aviva-DLG combination could be an attractive proposition, which is worth exploring in our view.
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