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Aviva Plc reached a preliminary agreement to buy Direct Line Å˽ðÁ«´«Ã½Ó³»­ Group Plc for £3.6 billion ($4.6 billion) in a deal that would create the UK’s largest motor insurer.

London-listed Aviva sweetened its bid in the latest negotiations with Direct Line to 275 pence per share, according to a statement on Friday. The cash-and-stock proposal would see Aviva issue new shares and make dividend payments to Direct Line shareholders.

Direct Line said its board would be inclined to recommend the proposal to its shareholders should a firm offer be made, confirming a Bloomberg News report on Thursday. For the motor insurer, the agreement could mean it will finally succumb to a suitor after fending off takeover interest for months.

UK Insurer Aviva Said to Boost Direct Line Takeover Bid to £3.4 Billion

The revised bid is a “good deal all round,” Panmure Liberum analysts wrote in a note to clients. “Aviva could have afforded to pay a higher amount, factoring expense and capital synergies,” the analysts said, adding the deal represents “an excellent multiple” for Direct Line shareholders.

Direct Line shares rose as much as 8.5% in London, while Aviva’s stock was broadly unchanged.

Bloomberg News had also reported on Thursday that Aviva boosted its initial bid for Direct Line to about 261 pence per share. That’s up from its initial cash and stock bid of 250 pence per share, or £3.3 billion, which was rejected as “opportunistic.”

Combined, Direct Line and Aviva would become the UK’s largest motor insurer — catapulting past their larger competitor Admiral — and Bloomberg Intelligence said the deal would double Aviva’s share in that market.

What Bloomberg Intelligence Says:

Aviva’s initial proposal to buy Direct Line looks fraught with risk, as to be successful, most of the acquired company’s costs need to be eliminated and its auto-insurance book re-underwritten. A joint statement indicates Aviva paying in the region of £3.5 billion via cash and shares, valuing Direct Line at 2.8x its 2023 tangible equity (when the latter made a negative 14.9% operating return on tangible equity). The transaction could double Aviva’s UK auto-insurance market share to around 24%, and the company has until Dec. 25 to firm up deal terms.

— Charles Graham, Bloomberg Intelligence

Aviva’s latest proposal consists of 129.7 pence in cash plus 0.2867 new Aviva shares for each Direct Line share. It also includes dividend payments of up to 5 pence per Direct Line share.

Under UK takeover rules, Aviva has until 5 p.m. local time on Dec. 25 to announce a firm intention to make an offer or walk away.

Aviva has started hunting for acquisitions again after Chief Executive Officer Amanda Blanc pursued a series of divestments that slimmed down the insurer and left it more focused on the UK. In March, Aviva said it was entering the Lloyd’s insurance market through a £242 million purchase of Probitas. Aviva shares have gained 13% this year, valuing it at £13.1 billion.

Last year, it agreed to buy Corebridge Financial Inc.’s UK protection business AIG Life Ltd. for £460 million. Aviva is among potential suitors that have been studying Esure Group Plc, the British home and motor insurance firm backed by Bain Capital, Bloomberg News has reported.

Direct Line has been pursuing an independent path after rebuffing a proposal from Belgian rival Ageas in March that valued it at around £3.2 billion. It said last month it’s going to cut about 550 jobs as part of a turnaround plan aimed at saving £50 million next year.

Bromley, England-based Direct Line sells insurance under its eponymous brand as well as through units including Churchill, Green Flag, Privilege and Darwin Motor Å˽ðÁ«´«Ã½Ó³»­. In addition to car insurance, it also offers home, travel, pet and life insurance as well as offering cover for businesses.

Photograph: The offices containing the headquarters of Aviva Plc in London; Photo credit: Jose Sarmento Matos/Bloomberg

Topics Mergers & Acquisitions