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Aviva (LSE: AV.) Shareholders are a patient bunch and shares struggle. Despite a successful restructuring and an expected dividend yield of 7.5%, the price is down 17% in five years.
Given that Aviva seemed undervalued, I even wondered if someone might make a takeover bid. But then Aviva turned the tables and reached out. Direct Line Insurance Group (LSE: DLG).
On December 23, we learned that the boards of the two companies had agreed a recommended cash and share offer for Aviva to buy Direct Line.
No changes yet
The initial market reaction saw barely any movement in Aviva's share price, but Direct Line rose another 3% in early trading.
That really cements the recent trend, with Direct Line shares up 58% since news of the talks first broke on November 27.
The final terms of the deal mean that Direct Line shareholders will receive 0.2867 new Aviva shares, as well as 129.7 pence in cash, plus “up to 5% in the form of dividend payments”for each action.
Details are subject to board and shareholder approval. But the announcement says that Direct Line's board of directors intends to “unanimously recommend that Direct Line shareholders vote“Accept.
Direct line earnings
Aviva reckons the deal values Direct Line shares at 275p, 10% above the market price as I write. And it is a 73% premium over the closing price on November 27.
Sounds like a fantastic Christmas present for Direct Line shareholders. Naturally, the bosses of both companies are brimming with enthusiasm.
I've even thought several times about buying some Direct Line shares, despite its modest dividend. But it had been struggling, in a highly competitive insurance market blighted by inflation and adverse weather.
Still, the stock was at what I thought was an undemanding price-to-earnings (P/E) valuation based on forecasts of an earnings recovery. At least, before the Aviva push.
Effective versus dilution
But as an Aviva shareholder, I really have to wonder if we're getting a good deal here.
Direct Line’s board rejected Aviva’s previous approach, calling it “highly opportunistic“. He clearly wasn't going down without a fight if he didn't see enough cash on the table. So this final offer at least avoided a protracted hostile takeover battle.
Aviva completed a £300m buyback of its own shares in June 2024. And it is now issuing new shares to partly pay for the acquisition.
We have some dilution to understand this, and brokers' forecasts will surely be up in the air for a while.
What's next for dividends?
Almost as if to head off concerns about dilution, Aviva said so “intends to declare a mid-digit percentage increase in dividend per share upon completion.”
And the board”Additionally, it intends to maintain current guidance of mid-single-digit growth in the cash cost of the dividend from this reassessed level.“
For me, investing for long-term dividends is enough to keep me on board. But I suspect concerns over the acquisition price could mean further weakness in Aviva's share price.
