What’s next for Direct Line after Ageas abandons takeover attempt?
Direct Line’s chief executive, Adam Winslow, has only been in the job for three weeks but is already making a strong impression.
Since he joined the firm from rival Aviva, Direct Line has fought a takeover attempt from Belgian insurer Ageas, brought back its dividend and unveiled plans to cut costs by more than £100m per year.
Direct Line confirmed late last month its board had unanimously rejected a cash-and-shares takeover offer from Ageas, saying it undervalued Direct Line’s future prospects and was “highly opportunistic”.
It was a big move from Ageas, which valued Direct Line at £3.1bn – more than half of its own market capitalisation.
Ageas later raised its offer by around three per cent, which it said valued the firm at 239p per share – a 46 per cent premium to Direct Line’s share price immediately before the first offer was announced. Analysts at Jefferies said an offer of between 270p and 300p would have been more likely to succeed.
After the second offer was also rebuffed, Ageas confirmed after the stock market closed on Friday that it would not be making another bid for Direct Line. The British firm’s shares dropped as much as 15.8 per cent on Monday in a sign that markets were hoping for a higher third offer.
Ageas’ takeover attempt comes amid a difficult period for Direct Line. Winslow’s predecessor, Penny James, announced last January she would step down in the wake of a profit warning on an unexpected rise in weather-related claims. The jump in costs forced the insurer to scrap its dividend.
In response to Ageas’ offers, the firm said its board was confident in Direct Line’s “standalone prospects”. Winslow went on to announce that the company would address its sluggish performance through a “comprehensive strategic review” in the first half of 2024.
It restored a dividend last week while revealing that it notched £277.4m pretax profit last year, up from a £301.8m loss in 2022. Direct Line was boosted by the sale of its brokered commercial business to Canadian property and casualty insurer Intact Financial for £520m, gaining £443.9m after transaction costs.
Direct Line outlined plans to save £100m per year by the end of 2025 and raised its net insurance margin guidance to 13 per cent by 2026.
Russ Mould, investment director at AJ Bell, told City PM that Direct Line’s results “may have been enough to persuade shareholders to give relatively new boss Adam Winslow a fair chance”.
The firm has scheduled a capital markets day in July to update investors on its plans for cost efficiencies and margin improvement.
Mould said: “Shareholders may have therefore simply concluded that Ageas was offering too little. This makes sense from the buyer’s perspective – it is their prerogative to pay as little as they can, to protect their downside and maximise upside potential, the same as it is for any investor, whether they own one share or all of them.”
Still, Direct Line reported an annual operating loss of £189.5m in 2023 as it battled high motor claims inflation.
The firm has also been hit by payouts to customers after it agreed last July to pay £30m in compensation after charging existing customers more than new ones for car and home insurance.
On Ageas’ part, one of its top 10 investors was reportedly campaigning against the takeover bid among shareholders, arguing it was a strategic U-turn and could disrupt the firm’s strategy.
Ageas’ chief executive is understood to have flown to China earlier this month to meet senior officials from the firm’s largest shareholder Fosun amid speculation he was trying to gather support for a higher third offer.
The Belgian firm said on Friday that it was “not able to identify additional elements based on publicly available information” that would justify another raised offer but that it “continues to believe in the underlying attractiveness and future opportunities of the UK personal lines sector and the role of Ageas UK in this market”.
Ageas’ UK arm has refocused on personal lines in recent years, having offloaded most of its commercial lines business in 2022.
Matt Britzman, an analyst at Hargreaves Lansdown, said: “Now we’re back to reality, focus turns to a company on the brink of a turnaround but with plenty to do. Performance is improving and new guidance was promising, but the crucial question is whether this reflects market-wide improvement or the company’s own successful turnaround efforts. For now, it looks like it’s weighted toward the former.”