Investing.com -- Aviva plc (LON:AV) has reached a preliminary agreement with Direct Line Insurance Group plc (LON:DLGD) to buy the entire share capital of Direct Line , as per a joint statement.
Under the terms of the proposal, Direct Line shareholders would receive a combination of cash, shares in Aviva, and potential dividend payments.
Specifically, Aviva plans to offer 129.7 pence per Direct Line share in cash, funded by its internally available resources, along with 0.2867 new Aviva shares for each Direct Line share.
Additionally, shareholders may receive up to 5 pence per share in a dividend, subject to approval by the Board of Direct Line, prior to the completion of the deal.
The 275 pence per share consideration is a 73.3% premium on the last closing share price of Direct Line before the offer period began, and a 49.7% premium based on the six-month volume-weighted average share price.
“Aviva believes in the strong strategic and financial logic for a combination of Direct Line into the Aviva group,” the joint statement said.
However, Direct Line’s Board remains focused on its current strategy and leadership team, expressing a preference for the company to continue as a standalone entity, while acknowledging that the offer could represent a favorable value for shareholders.
Should the deal go through, Direct Line’s shareholders would own around 12.5% of the expanded Aviva group.
Direct Line’s Board, after consulting with advisors and shareholders, has indicated a willingness to recommend the offer if a firm intention to make an offer is formally announced.
The deal is, however, contingent on the completion of due diligence and the satisfaction of customary conditions.
Aviva has made it clear that it reserves the right to modify the terms of the offer or introduce different forms of consideration before making a firm bid, and has stated that any adjustments could reflect changes to the transaction terms, including potential dividends or other shareholder actions by Direct Line.
Analysts at Jefferies noted that Aviva’s latest offer of 275p per share, representing a 10% increase from the initial bid of 250p and a 1.8% premium over their anticipated offer price of 270p, is unsurprisingly one that Direct Line's Board is inclined to recommend.
They described the outcome as a swift and fair resolution to the situation, which allows Aviva to avoid the complexities and challenges of pursuing a hostile bid.
While a firm offer has yet to be confirmed, Aviva must make a decision by December 25, on whether to move forward with the offer or withdraw.
This deadline could be extended with approval from the UK Takeover Panel.
Shares of Direct Line jumped over 7% following the announcement.