Former high-yield share Direct Line (LSE: DLG) axed its juicy dividend last year. The shares also fell around 20% in 2023. In trading today (28 February), though, Direct Line shares have soared. As I write this on Wednesday afternoon, the price is up 27% since the start of the day’s trading session.
Here is why.
Possible bid
The shares rose on a press report that the financial services provider had received a takeover offer from European rival Aegeas. The British company was reported to have rejected the offer.
For now, Direct Line has not issued a statement on the stock market’s regulatory news service about this. However, given the leap in its shares and press speculation, I expect one to be forthcoming.
What we know
While we do not know whether there has been an approach of any kind, other things are clearer.
Direct Line is a well-known brand in the UK insurance market. It has millions of customers.
While it made a loss last year, before that it has been earning hundreds of millions of pounds after tax annually for a number of years. In 2021, for example, the company reported post-tax profit of £344m.
It remained in the red at the interim stage this year, reporting losses of £76m before tax. The company has not provided guidance on what it expects full-year earnings (or losses) to be, although it did say that operating profit “is expected to continue to be adversely affected by the earn through of previously written Motor business”.
Looking for value
If I was a competitor, I would likely be running the numbers on a potential acquisition of Direct Line.
After all, it has a well-established brand and large customer base. The current market capitalisation is £2.7bn, which is less than 10 times the annual earnings it was making before last year’s profit warning and accompanying dividend cancellation.
So, although for now it is not clear whether or not Ageas did make an offer, it would not surprise me if it did. Even after Direct Line shares jumped today, they are still 43% lower than they were five years ago.
If a bid is confirmed, I think the shares may rise more on City hopes of a higher offer or rival bid.
Should I buy?
I am not a rival looking to buy a business, though. I am a private shareholder.
Some people buy shares they think could be subject to a takeover hoping the price will jump. But as an investor, not a speculator, my focus is on whether I can buy into what I think is a great business with an attractive share price.
Direct Line’s abrupt profit warning last year made me wonder how well run the business was. It seemed to have been surprised by the level of storm claims, which to me should typically be within an underwriter’s expertise. Since then, management has changed but the business continues to struggle when it comes to profitability.
I see it as a company still in turnaround mode. That makes it hard for me to value Direct Line shares. I have no plans to invest.
