Direct Line Insurance Group (LSE: DLG) shares soared in trading yesterday (28 November) after it emerged the business had received a takeover approach from one of the UK’s biggest listed companies. But will a deal actually be done?
Show me the money!
Let’s start with what we know. The potential suitor is none other than FTSE 100 insurance juggernaut Aviva (LSE: AV). On 19 November, it made a non-binding cash and shares offer that valued the company at £3.3bn — a huge premium on the Direct Line share price at the time.
Sounds pretty great, right? Well, it turns out that offer was spurned by Direct Line’s board and labelled it as “highly opportunistic“. Funnily enough, this isn’t dissimilar to what was said earlier in the year when management rejected a £3.17bn approach from Belgian rival Ageas.
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Prior to yesterday’s news, I suspect a lot of investors were wishing the earlier deal had gone through. Trading-wise, the owner of the Churchill brand has been having a torrid time. Factors such as inflation, poor weather and intense competition have been blamed. Only a few weeks ago, the company declared that it would be cutting 550 jobs to save costs.
Grab the popcorn
Whether yesterday’s incredible gain holds over the next few days will be fascinating to see. On the one hand, it doesn’t look like Aviva’s ready to give up its pursuit. Indeed, the Financial Times reported yesterday evening that the £13bn-cap has now contacted Direct Line’s investors directly.
If it can drum up enough support, it might not matter what new(ish) CEO — and former Aviva man — Adam Winslow and his team think. A hostile takeover might be on the cards.
Of course, I wouldn’t blame holders for secretly hoping that another rival might be tempted to enter the fray. A bidding war would surely generate an even bigger return.
No guarantees
On the other hand, the stock market’s littered with examples of share prices falling back after takeover talk stalls.
As an example, shares in property portal Rightmove recently jumped when a takeover approach from the Rupert Murdoch-backed real estate company REA Group was made public. Four rejected bids later, REA Group backed out for good.
Sure, Rightmove stock’s higher now than it was before the announcement. But it’s also yet to return to the heights seen in September.
If Ageas walked away from Direct Line, there’s a possibility that Aviva will do the same.
More bids to come?
Regardless of what happens next, I suspect many holders are feeling a lot happier about things as they sip their morning coffee. Stick or twist? There are worse problems to have.
I would never buy a company’s shares just in the hope that it will be snapped up by an admirer. However, this development does show that taking a contrarian stance has the potential to be (very) lucrative. I’d be looking at a gain of around 60% had I picked up this value stock when it sank back to a multi-year low in summer 2023!
With the UK market still looking cheap, I’m sure Direct Line isn’t the only company someone’s running the rule over.
