Aviva plc (LON:AV) and Direct Line announced they have reached agreement on the terms of a recommended cash and share offer for Direct Line.
· The Acquisition builds on Aviva’s strong performance over the last four years, with Aviva having been transformed into a high-performing business with a clear strategy. The Acquisition will accelerate Aviva’s momentum and will offer customers and shareholders a number of benefits as set out below.
· Under the terms of the Acquisition, each Direct Line Shareholder will be entitled to receive:
| For each Direct Line Share held: | 0.2867 New Aviva Shares;129.7 pence in cash; andup to 5 pence (in aggregate) in the form of dividend payments to be paid (subject to the approval of the Direct Line Board) prior to Completion(together, the “Offer Consideration”) |
· Based on the Closing Price of Aviva Shares of 489.3 pence on 27 November 2024 (being the last closing share price before the commencement of the Offer Period), this values each Direct Line Share at 275 pence and values the entire diluted share capital of Direct Line at approximately £3.7 billion.
· This represents a premium of approximately:
° 73.3 per cent. to the Closing Price of 158.7 pence per Direct Line Share on 27 November 2024; and
° 49.7 per cent. to the six month volume weighted average price of 183.7 pence per Direct Line Share to 27 November 2024.
· Upon Completion, it is expected that Aviva Shareholders will own approximately 87.5 per cent. and Direct Line Shareholders will own approximately 12.5 per cent. of the issued and to be issued share capital of Aviva.
Aviva and Direct Line have agreed certain arrangements with regard to the payment of further dividends and returns of capital prior to the Effective Date. Further details are set out in paragraph 11 (Dividends).
Commenting on the Acquisition, Dame Amanda Blanc, Group Chief Executive Officer of Aviva, said:
“This deal is excellent news for the customers and shareholders of Aviva and Direct Line. It builds on our track record of delivering four years of strong financial performance and, in line with our strategy, it accelerates our growth in capital light business.
Aviva and Direct Line share a deep commitment to excellence in looking after customers, and this will remain a top priority following the Acquisition. The financial strength and scale of the Combined Group means customers will benefit from competitive pricing, an enhanced claims experience and even better service.
The acquisition of Direct Line by Aviva will bring together a number of the UK’s leading brands in a more efficient business, which is very well positioned to generate strong returns for all shareholders.”
Commenting on the Acquisition, Danuta Gray, Chair of Direct Line, said:
“The Board of Direct Line is pleased to recommend Aviva’s offer for the company, which delivers significant value for Direct Line Shareholders. The offer represents a substantial premium and reflects the attractiveness of Direct Line, a high quality business with powerful insurance brands, excellent customer focus, and exceptional people.
The Board of Direct Line has been very pleased with the progress made by its new management team, but Direct Line is in the early stages of an extensive turnaround, and it believes the offer allows Direct Line Shareholders to realise the value of their investment in the near term. Direct Line’s customers and employees will be joining an established, successful business with a wide array of insurance products that is well-placed to deliver for all its stakeholders.”
Adam Winslow, Chief Executive Officer of Direct Line, commented:
“Direct Line is an excellent business, home to many well-loved insurance brands, and this year we have made fast progress on our turnaround strategy. Bringing Direct Line and Aviva together offers the opportunity to create a strengthened and enlarged business, with both organisations sharing a deep passion for serving customers and for supporting their people. In a highly competitive UK general insurance marketplace, the combined entity will be very well placed to deliver for its customers. I am proud of what Direct Line has achieved to date, and this offer will enable the business to continue to succeed as part of a combined group with Aviva.”
Background to and reasons for the Acquisition
In 2020, Aviva announced its strategic priorities, including plans to simplify its operations and become a leading Insurance, Wealth, and Retirement business. Since then, Aviva has refocused its portfolio on its core markets in the UK, Ireland and Canada, aiming to deliver profitable growth for shareholders whilst maintaining the financial strength to reinvest in the business, selectively pursue M&A and deliver additional shareholder returns.
As part of this strategy, Aviva has executed eight international disposals, rebuilt its financial strength, and enhanced its core businesses with bolt-on M&A, providing greater scale and capabilities. The proceeds from the disposals, combined with strong operational execution, have enabled Aviva to return £9 billion to shareholders between 2020 and 2023, while positioning the Aviva Group as the UK’s leading diversified insurer across Insurance, Wealth and Retirement.
The Acquisition builds on Aviva’s strong momentum and is expected to result in the following benefits:
· Creating a leading UK Personal Lines franchise: the Combined Group will be well-positioned to address this attractive market segment, which generated at least £26 billion of gross written premium (“GWP“) in 2023, and will be able to build on the strong momentum delivered to date by Aviva’s Personal Lines management team.
· Accelerating Aviva’s capital-light strategy: surpassing the existing ambition of generating 70 per cent. of operating profits from capital-light businesses by 2026.
· Delivering better outcomes for customers: including competitive pricing, faster claims payments supported by stronger supply chains, a comprehensive range of products and services, advanced digital capabilities and greater investment in technology.
· Creating significant value for Aviva and Direct Line shareholders: expected EPS accretion of ~10 per cent. once pre-tax cost synergies of £125 million are fully realised, with underlying EPS accretion expected from the first full year post-Completion.
· Enhancing shareholder distributions: as part of its commitment to shareholder returns, Aviva currently intends to declare a mid-single digit percentage uplift in the dividend per share following Completion. Aviva further intends to maintain the current guidance of mid-single digit growth in the cash cost of the dividend from this rebased level.
The Acquisition is also consistent with Aviva’s capital management framework. Aviva expects its Solvency II shareholder cover ratio to remain at the upper end of the Aviva Group’s working range, with upside from material capital synergies over time. The Acquisition is not expected to impact the Aviva Group’s credit ratings and Aviva expects centre liquidity to remain above £1 billion, in line with its capital management framework.
Background to and reasons for the recommendation
Direct Line is one of the UK’s leading general insurance companies, with a leading personal lines customer franchise, scaled market positions and some of the most recognisable brands in the market across a complementary and diverse portfolio.
Direct Line recently appointed a new, highly experienced senior leadership team to execute an ambitious turnaround strategy aimed at unlocking value by achieving attractive and sustainable growth in profitability, capital generation and shareholder returns after a period of disappointing performance. This strategy builds on Direct Line’s strong foundations. Following Adam Winslow’s appointment as Direct Line’s CEO and the completion of a comprehensive strategic review across the Direct Line Group, Direct Line outlined its strategy at its Capital Markets Day in July 2024. This strategy focused on accelerating a turnaround to target leading positions in Direct Line’s core markets of Motor, Home, Commercial Direct and Rescue, and building a strong culture of performance.
As recently evidenced in Direct Line’s H1 2024 and Q3 2024 trading updates, Direct Line has demonstrated early progress in executing this turnaround strategy at pace. This includes a return to group profitability in H1 2024, a well-developed product build for the launch of the Direct Line brand on price comparison websites for Motor, further progress on re-platforming the Home segment and the implementation of a series of initiatives supporting the expected delivery of around £50 million of gross cost savings in 2025. In doing so, Direct Line has demonstrated material progress towards the Direct Line Group’s target of delivering at least £100 million gross run-rate cost savings by the end of 2025.
Despite this early strategic progress, the Direct Line Directors do not believe that Direct Line’s share price and valuation was appropriately reflecting the potential for the business, with Direct Line’s share price trading close to a 12-month low prior to Aviva’s initial approach regarding a possible offer for Direct Line in November 2024.
Against this backdrop, whilst the Direct Line Directors have considerable conviction in the delivery of Direct Line’s turnaround strategy under its new senior leadership team, it has concluded, alongside its advisers and following extensive consultation with Direct Line Shareholders during the Offer Period, that Aviva’s offer to acquire Direct Line delivers Direct Line Shareholders an attractive valuation of Direct Line today when taking into account the risks inherent in a multi-year turnaround and the prevailing market backdrop.
In considering the terms of the offer, the Direct Line Directors have taken into account a number of factors, including the premium and the consideration mix, and offering Direct Line Shareholders exposure to the significant synergies and substantial additional value upside potential in the Combined Group which are expected to accrue to these shareholders in excess of receiving an attractive headline premium on Completion.
Recommendation
The Direct Line Directors, who have been so advised by Morgan Stanley, Robey Warshaw LLP and RBC Capital Markets as to the financial terms of the Acquisition, consider the terms of the Acquisition to be fair and reasonable. In providing their advice to the Direct Line Directors, Morgan Stanley, Robey Warshaw LLP and RBC Capital Markets have taken into account the commercial assessments of the Direct Line Directors. Morgan Stanley and Robey Warshaw LLP are providing independent financial advice to the Direct Line Directors for the purposes of Rule 3 of the Takeover Code.
Accordingly, the Direct Line Directors intend to recommend unanimously that Direct Line Shareholders vote (or procure votes) in favour of the Scheme at the Court Meeting and to vote (or procure votes) in favour of the Direct Line Resolution(s) at the General Meeting (or, in the event the Acquisition is implemented by way of a Takeover Offer, to accept, or procure acceptance of, such Takeover Offer) as the Direct Line Directors who (or whose immediate family) beneficially hold Direct Line Shares have irrevocably undertaken to do (or procure to be done) in respect of their entire beneficial holdings of 556,447 Direct Line Shares in total, representing in aggregate approximately 0.04 per cent. of Direct Line’s ordinary share capital in issue as at the Latest Practicable Date. These irrevocable undertakings remain binding in the event a higher competing offer is made for Direct Line by a third party.
Aviva Board Statement
The Acquisition constitutes a “significant transaction” for Aviva for the purposes of the Listing Rules and this Announcement constitutes a notification pursuant to Chapter 7 of the Listing Rules.
The Aviva Directors believe that the Acquisition is in the best interests of Aviva Shareholders as a whole.
Information relating to Aviva
Aviva is one of the UK’s leading diversified insurers across Insurance, Wealth and Retirement, with 19.2 million customers in the UK, Ireland and Canada. Aviva’s purpose is to protect the things that matter most to its customers: their homes and belongings, their health and wealth, their future and their families. Aviva has a clear strategy to achieve its purpose based on accelerating its growth in capital light business, providing a digitally-led customer experience, efficiency and sustainability. As at 30 June 2024, the total group assets under management of the Aviva Group were £398 billion, the estimated Solvency II shareholder capital surplus was £8.2 billion and the Aviva Group’s solvency capital ratio (shareholder view) was 205 per cent.
Information relating to Direct Line
Direct Line is one of the UK’s leading insurance companies. The Direct Line Group’s vision is to create a world where insurance is personal, inclusive and a force for good. Through its well-known brands which include Direct Line, Churchill, Privilege, Darwin, Direct Line for Business and Green Flag, Direct Line helps people to carry on with their lives, giving them peace of mind now and in the future. Its brands offer a wide range of general insurance products across Motor, Home, Commercial Direct, Travel, Pet and Rescue, both direct to customers and through PCW and it underwrites insurance products distributed by its third-party partners. The Direct Line Group believes that by embracing sustainable practices it creates a better corporate culture able to provide more reliable products and bring long-term rewards for its customers, people and shareholders. For the year ended 31 December 2023, the Direct Line Group generated GWP and associated fees of £3.1 billion. As at 30 June 2024, the estimated Solvency II shareholder capital surplus was £1.1 billion and the Direct Line Group’s solvency capital ratio (shareholder view) was 198 per cent.
Timetable and Conditions
· It is intended that the Acquisition will be effected by way of a Court-sanctioned scheme of arrangement under Part 26 of the Companies Act. However, Aviva reserves the right to elect to implement the Acquisition by way of a Takeover Offer, subject to the consent of the Panel (where necessary) and the terms of the Co-operation Agreement.
· The Acquisition is conditional on, among other things, the approval of the requisite majority of the Scheme Shareholders at the Court Meeting and Direct Line Shareholders at the General Meeting. In order to become Effective, the Scheme must be approved by a majority in number of the Scheme Shareholders present and voting at the Court Meeting, either in person or by proxy, representing at least 75 per cent. in value of the Scheme Shares voted. In addition, the approval of the Direct Line Resolution(s) by Direct Line Shareholders representing at least 75 per cent. of votes cast at the General Meeting (expected to be held immediately after the Court Meeting) is also required for the implementation of the Scheme. Following the Court Meeting, the Scheme must also be sanctioned by the Court. Finally, a copy of the Court Order must be delivered to the Registrar of Companies, upon which the Scheme will become Effective. The Scheme must become Effective by no later than the Long Stop Date.
· The Acquisition will be made in accordance with the Takeover Code and on the terms and subject to the Conditions which are set out in Appendix 1 to this Announcement and on the further terms and conditions that will be set out in the Scheme Document, including approvals from the PRA, the FCA and the CMA.
· A short extension to the customary 28-day period for publication of the Scheme Document has been requested of, and consented to by, the Panel having regard to, amongst other things, the time required to report on the new Aviva 2025 Profit Forecast, the availability of Court dates and ensuring that the Scheme Document contains the most recent information as at the time of the Court Meeting and General Meeting. Accordingly, it is expected that the Scheme Document containing further information about the Acquisition and notices of the Court Meeting and the General Meeting, and which will be accompanied by the Forms of Proxy, will be published beginning-mid February 2025. The Court Meeting and General Meeting are expected to be held in March 2025. The Scheme Document will specify the actions to be taken by Direct Line Shareholders and will contain an expected timetable for the implementation of the Scheme.
· The Scheme is expected to become Effective in mid-2025, subject to the satisfaction or, where permitted, waiver of the Conditions set out in Appendix 1 to this Announcement.
This summary should be read in conjunction with, and is subject to, the full text of this Announcement and its Appendices.
The Acquisition will be subject to the Conditions and further terms set out in Appendix 1 to this Announcement and to the full terms and conditions which will be set out in the Scheme Document. Appendix 2 to this Announcement contains the sources of information and bases of calculations of certain information contained in this Announcement. Appendix 3 contains a summary of the irrevocable undertakings received in relation to this Acquisition. For a discussion of the risks to Aviva as a result of the Acquisition see Appendix 4. Information relating to the Quantified Financial Benefits Statement made in this Announcement and the reports of the Aviva reporting accountants and financial advisers are set out in Appendix 5. Appendix 6 contains a confirmation from the Aviva Directors in respect of the Aviva 2026 Profit Forecast. Appendix 7 contains definitions of certain expressions used in this summary and in this Announcement.
For the purposes of Rule 28 of the Takeover Code, quantified financial benefits statements contained in this Announcement are the responsibility of Aviva and the Aviva Directors. Appendix 5 sets out the anticipated quantified financial benefits relating to cost savings and synergies arising out of the Acquisition and provides underlying information and bases of belief. Appendix 5 also includes reports from Aviva’s reporting accountant, PwC, and its joint financial advisers, Goldman Sachs International and Citi, in connection with the anticipated quantified financial benefits statements, as required pursuant to Rule 28.1(a) of the Takeover Code, and provides underlying information and bases for the reporting accountants’ and financial advisers’ respective reports. Each of PwC, Goldman Sachs International and Citi has given and not withdrawn its consent to the publication of its report in this Announcement in the form and context in which it is included.
