Aviva PLC's (LSE:AV.) deal to buy Direct Line Insurance Group PLC (LSE:DLG) got a mixed welcome from Jefferies though analysts at the bank still kept a ‘buy’ rating on the UK insurer.
In short, the US bank reckons the deal offers compelling financial and strategic prospects but also comes with "material" integration risks.
After receiving the approval of the Direct Line board, Jefferies added it is likely that the deal will be completed.
On the plus side, by drawing a line through similar deals in the sector, as much as £200 million in cost savings might be possible.
Aviva might also be able to use the non-life core of Direct Line to give a major boost to its capital efficiency while absorbing a competitor should reduce the overall expense ratio, improve operating leverage and make the enlarged group more competitive.
On execution, Jefferies noted that Direct Line recently completed an IT investment programme but it's not clear which system ought to be decommissioned.
Since IPO, Direct Line also has consistently pursued a strategy of moving down the risk curve; “a strategy that appears to have failed to grow earnings sustainably”.
These are the risks, says Jefferies, but “in the long-term, we're hopeful that the integration of Direct Line can categorically demonstrate the value of the conglomerate proposition in the UK”.
The bank has a target price for Aviva of 560p against 476p today.