Shares in Direct Line (LSE: DLG) are up 25% after Ageas SA/NV, a Belgian-based insurer, confirmed media speculation that it was considering a possible offer for Direct Line. Aegeas management has not yet taken the proposal to Direct Line’s board, and it reserves the right to make an offer on less favourable terms.
The offer is described as being 100p for every share of Direct Line plus one share of Aegeas for every 25.24047 Direct Line shares owned. At the close of yesterday, the possible offer values Direct Line shares at 233p. Overall the deal values the entire share capital of Direct Line at £3,095 million.
Direct line share price premium
The cash and stock deal represents a premium of 42.8% to the 163.65p Direct Line shares were valued at yesterday’s close, Or, about 17.4% to the 198p they trade at now. But, it’s 34.0% below the 2015 peak of 353p per share.
Accounts holding Direct Line shares would be credited with 100p per share. One of Aegean’s shares for every 25.24047 shares of Direct Line owned. That shouldn’t be a problem but that share might be in the form of a CDI.
I have never been through a stock-for-stock, or part-cash deal before. I have always sold before the deal was completed. What happens I you own 26 shares of Direct Line, do you just get the one share of Aegeas? How about 49 shares, do you get rounded up to 2 or left with one? I cannot find answers to these questions.
Aegeas sees value in Direct Line’s motor and property insurance divisions
Anyway, back to the deal. The exchange ratio is not stated to be floating or fixed, so more clarity on that will be welcomed and possibly will come when the board of Direct Line is consulted. As to what they will say, I have no idea. I hope they feel this undervalues the company, and genuinely believe that. But that’s perhaps because I am getting a bit sick of seeing UK stocks pushed to lowly valuations and being picked off. Direct Line is due to release its 2023 results at the end of next month. Perhaps management will have leverage when they come out, or find themselves in a weakened position. I would wager that if this deal moves at an exponential pace, then the results are going to be bad.
Aegeas sees value in Direct Line, even as investors have sold it’s stock lower and lower and they did have reasons. Last year there was a dividend cut because of a deteriorating solvency ratio because of lower profits and losses on investments held. Stock buybacks were also cancelled. Settling claims became a lot more expensive than the company thought. Cars and car parts became more expensive due to inflation, and so did building materials making property claim costs spiral. The number of claims also bounced back strongly after COVID-19 as more cars hit the road, and there was a particularly harsh winter to deal with. Premiums were not increased commensurately to offset this. Outside of property and motor insurance, things were not so bad, but those two set the tone.
Aegeas is interested in the motor and homes business to complement its own UK operations in those lines. It sees strong potential in the sector. It sees claims patterns and frequency stabilising in its own operations.
Over the last 12 months, many of the UK sector fundamentals have improved as claims patterns and frequency have stabilised, while an evolution towards a healthier and more predictable market is being observed thanks to developing regulatory clarity and pricing practice changes
And that stabilisation might be seen in the Direct Line share price itself which looks to have bottomed in mid-2023, and there are hints of an uptrend emerging. So, with the earnings report for 2023 to look forward to at the end of March, and the twists and turns of this nascent takeover deal to observe: Direct Line is at least going to be interesting.
DISCLAIMER: James J. McCombie owns shares in Direct Line. The Storied Investor has no beneficial ownership position in any of the stocks or securities mentioned. No comment in this article should be construed as a recommendation of, or opinion regarding the future performance of, any stock or security or collection of them mentioned herein. Opinions expressed are the author’s and do not represent the views of The Storied Investor.
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