After Aviva PLC's (LSE:AV.) £3.3 billion takeover offer for Direct Line Insurance Group PLC (LSE:DLG) was rejected, another bid is a "distinct possibility", according to analysts.
The pair confirmed that an indicative cash and shares offer had been made, following press speculation, made up of 112.5p cash plus 0.282 new Aviva shares.
Based on Aviva's shares at 488p on 18 November, where the price roughly remained yesterday, this made the offer worth 250p per Direct Line share, with a total cost to Aviva of £3.28 billion.
Direct Line, as it did with a 239p per share approach from Belgian giant Ageas earlier this year, rejected the offer as "opportunistic", giving Aviva until 25 December to conclude formal terms.
Better deal may emerge
At 250p, the offer price represents around 12 times DLG's forecast 2025 earnings, which "is a good offer", said analyst Abid Hussain at Panmure Liberum, adding that DLG shareholders "would do well to accept" given the near 60% premium and the risk around their own turnaround.
But analyst Philip Kett at Jefferies said it was "a relatively small uplift from the previous two offers", similarly split between cash and shares, so he is "unsurprised" the bid was rejected.
With the potential synergies available to an acquirer, he sees an offer of at least 270p as "more realistic" and so believes "a higher offer might be forthcoming if the board considered engaging with Aviva".
Panmure's Hussian agreed that there are potentially significant cost and capital synergies, meaning Aviva "may have room to offer a slightly higher amount".
Aviva is not likely to raise the cash element of its offer, said William Hawkins at KBW, as it would stretch a Solvency II ratio that is already well below peers.
Flexing the offer to 300p by increasing the share offer would reduce the accretion to around 5% after synergies, he said.
Will a bidding war erupt?
If the DLG shares bounce towards 250p today, Hussain said he believed shareholders "should consider easing their holdings whilst still maintaining an interest in case of a higher bid emerging later",
He said a bidding war for DLG is "unlikely" but a higher offer emerging from Aviva "remains a distinct possibility".
UBS analyst Will Hardcastle said a "key differential" between this bid and the rejected approach earlier this year "is that it's a UK Insurance stock vs the prior proposal from Ageas of a Belgian stock".
He expects a debate from investors about whether it could encourage another approach from Ageas, for which he reckons the strategic and financial sense remains.
Andreas Van Embden at Peel Hunt said Aviva "could be persuaded to sweeten the deal" to somewhere around 260-265p, "which may help satisfy the DLG board".
But his initial view is that the offer is "reasonable" and DLG's rejection reflects the board’s confidence in the company's standalone outlook he believes "engaging with Aviva would make sense".
Deutsche Bank analyst Rhea Shah said if Aviva is successful it "could put pressure on its 2025 buyback".
Shares in DLG jumped 42% to 225.4p by late morning, while Aviva fell 3.2% to 473.7p.