Direct Line shares soar 25% on takeover bid!

Direct Line shares surged by a quarter on Wednesday, after receiving a takeover bid from a Belgian rival. But the approach was rejected, so it’s game on.

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For way too long, I’ve argued that large-cap and mid-cap UK shares are far too cheap. Hence, I expected several takeover approaches for FTSE 100 and FTSE 250 firms in 2024. And on Wednesday, 28 February, it was Direct Line Insurance Group (LSE: DLG) and its shares that were put in play.

Direct Line loses ground

Founded in 1985, the business has grown to be a household name in financial services, providing motor, business, life, pet, and travel insurance under various brands. Its red telephone logo is widely recognised as a British brand.

Then again, Direct Line shares have been on a rocky ride for at least the last five years. Indeed, they have lost a hefty 42.9% of their value in the past half-decade.

More recently, at their 52-week high, they peaked at 210.6p on 28 February — exactly a year ago. They then plunged, hitting their 2023 low of 132.11p on 7 July. Ouch.

However, the share price has since bounced back, closing at 163.35p on Tuesday, 27 February. This was some relief for me, as my wife and I bought this stock for 201p a share in July 2022.

The famous insurer is now a target

What led us to invest in this insurance group was its juicy cash dividends. But following heavy claims in the winter of 2022/23, the company cancelled its payout in early January 2023. Of course, this sent the stock spiralling southwards like a stone.

On Wednesday, much better news arrived for the group’s struggling shareholders. Just before noon, Belgian insurer Ageas admitted that it had made an unsolicited bid to buy the British business.

Ageas has indicated that it is willing to pay 233p per Direct Line share, made up of a mixture of cash and the Belgian company’s own shares. This values the FTSE 250 firm at £3.1bn.

This represents a tidy 42.6% premium to Direct Line’s closing price the day before. But in my long experience, boards of directors rarely accept first bids. Typically, they reject these as undervalued and demand a higher knockout price.

Hence, it seems to me unlikely that the Brussels-based group will win this battle in the first round. Meanwhile, the shares have leapt to 201.9p, a discount of 13.3% to the offer price — also typical at this stage of the takeover dance.

What’s next?

Before the market close on Tuesday, Direct Line’s directors fired back. Predictably, they rejected the “highly conditional, non-binding indicative proposal” from Ageas, which actually arrived on 19 January.

The deal — 100p in cash and one new Ageas share for every 25.24047 Direct Line Group shares — was “uncertain, unattractive…significantly undervalued the group… and also being highly opportunistic in nature”. Hence, the board duly rejected this approach.

What happens next is largely in the hands of the gods of M&A (mergers and acquisitions). But new CEO Adam Winslow will arrive on 1 March to find a very hot potato on his desk.

As a Direct Line shareholder, I’m delighted that a potential bidder has identified and partly unlocked the value hiding inside this established business. What’s more, I’m holding on tight to my stake, in hopes of a higher offer emerging!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliff D’Arcy has an economic interest in Direct Line Insurance Group shares. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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