Aviva and Directline were launched this week as two rival insurance companies in the UK. They end it as future marriage partners.
After receiving three offers from Aviva, the first of which was only announced last week, DirectLine’s board agreed late on Thursday to a £3.6bn takeover with a larger rival.
If the proposed deal is approved by shareholders, the deal would create a £16bn insurance company that would dominate the UK car and home markets, with over 20% and 15% stakes respectively. It will be.
The acquisition is a coup for Aviva, led by chief executive Dame Amanda Blanc. At the start of her term in 2020, she pledged to move quickly to achieve the FTSE 100 group’s strategic objectives. She successfully sold eight non-core businesses within a year and a half.
Direct Line’s approach was even faster.
“This whole process took eight days from start to finish. It was very quick. Typical Amanda,” said one person close to the Direct Line deal. “She sold eight businesses in 18 months. She doesn’t play around.”
The proposed deal would mark the end of the independence of Direct Line, an insurance company founded in 1985 and then spun off from Royal Bank of Scotland in 2012 in the wake of the financial crisis.
The company’s capitulation to Aviva calls into question the future of former Aviva executive Adam Winslow, who took the helm of Direct Line in March following the departure of Penny James. She will step down in 2023 after a tumultuous two years for the business, which saw it receive profit warnings and temporarily cut its dividend.
The company, which had been seen as takeover-friendly, fended off two approaches from Belgian insurer Agias earlier this year.
The seeds of Aviva’s plan were first planted in the wake of that failed approach, people close to the deal said. Aviva began seriously considering Direct Line over the summer and reached a non-binding offer of 250 pence per share on 19 November.
This came as a surprise to Direct Line’s board, according to people close to the bid.
Aviva had previously explored a potential deal with British insurance company Essure, which is owned by private equity group Bain Capital. But the company’s interest has waned in recent weeks as it focuses on direct lines, people familiar with the matter said.
Blanc was looking for an acquisition to reorient the £13bn business, which has a large life insurance book, into areas with less capital. Direct Line fit the bill. Although it struggled in some areas, Direct Line had some well-known brands such as Churchill and Privilege. Aviva believed there would be “significant” synergies and capital savings from the collaboration between the two groups.
Meanwhile, Winslow was in the early stages of turning around Direct Line, which was battling a tough auto insurance market. He had assembled a new team and started planning a £100m cost-cutting plan, but the UK group’s weak share price left it vulnerable.
Aviva first offered 250p a share in mid-November, valuing DirectLine at around £3.3bn. By November 26, DirectLine’s board, led by Danuta Gray, had rejected the approach and refused to get involved, saying it “substantially” undervalued the business. A statement was issued to the market the following day.
But Mr. Gray met with Aviva representative George Kalmer to explain why his bid was rejected, according to two people familiar with the situation.
Negotiations were primarily conducted through the chairs of both companies, with the involvement of advisers, as Aviva subsequently increased its offer to 261p per share on Tuesday this week.
On Wednesday, Direct Line’s board of directors convened an emergency meeting. By Thursday, Bloomberg News published a news report about the improved offer. The board has not yet responded to the latest proposal, and the leak forced an accelerated timeline. The two sides reached an agreement late on Thursday at 275 pence per share.
Direct Line shares rose 6.5% to close at 251p in London trading on Friday. Earlier this week, it was sluggish around 2:30 p.m.
However, the speed with which Direct Line was developed raised eyebrows even among those close to the deal.
“Why did we need to go through such public bidding? Everything was pointing to 275p,” said a person familiar with the deal. “This is how the market works these days. People just want to look like they’re putting on weight.”
Directline worked with bankers from Morgan Stanley, British boutique bank Robbie Warshaw and RBC, while Aviva was advised by Citigroup and Goldman Sachs.
Another unusual element of the deal is that Goldman advised Direct Line on its defense against Ageas earlier this year. A bank spokeswoman said the company had “mutually agreed to terminate its contract with Direct Line in the summer.” This will allow the company to advise Aviva and also act as a corporate intermediary.
The deal has been welcomed by DirectLine’s top investors, who have urged the board to stick with the deal in order to achieve a better deal than the initial price of 250 pence per share.
“The price of 275p looks acceptable given the composition of the shares. Had it been an all-cash offer, we probably would have had a different answer,” said one of the largest shareholders of both Aviva and Direct Line. said.
“The willingness to accept this offer is not a reflection on the DLG management team. It’s a result of value.”
Another DirectLine shareholder, who is also Aviva’s largest investor, said he initially thought Aviva might “hold back”, but then became concerned that DirectLine would not get involved.
He added that a second offer of 261p made late on Thursday was “not enough”.
The latest offer, 275p, was “a sum of money that Aviva sees value in and is acceptable to Direct Line”.
The transaction has not yet been concluded by Direct Line’s shareholders, who may request further additions and is subject to Aviva’s due diligence. Aviva has until December 25 to formalize its approach.
Still, there may be other competitive hurdles to overcome before the group, which controls more than a fifth of the auto insurance market, is to consolidate. Both the Competition and Markets Authority and the Bank of England Prudential Regulation Authority are expected to scrutinize the deal.
There’s also the delicate question of how the newly expanded team will fit together, given the reported tension between Winslow and his former boss Bran. “Their working relationship is professional,” said one source close to Aviva.
Still, the deal will see Mr Winslow receive £1.1m in cash and the equivalent of £1.2m in Aviva shares, or a total of £2.3m (based on share options as of April 5), according to MKP Advisors.
Direct Line and Aviva both declined to comment.
“Aviva executed every step of the takeover dance to perfection,” said AJ Bell’s Dan Coatsworth.
Ahead of the Christmas deadline, those involved in the deal are hoping that Aviva can close the deal as quickly as it started.
