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Aviva (LSE: AV.) shareholders are a patient lot, with the shares struggling. Despite a successful restructuring plus a forecast 7.5% dividend yield, the price is down 17% in five years.
With Aviva looking undervalued, I’d even been wondering if someone might make a takeover offer. But then Aviva turned the tables and approached Direct Line Insurance Group (LSE: DLG).
On 23 December, we heard that the boards of the two companies have reached an agreement for a recommended cash and share offer for Aviva to buy out Direct Line.
No change yet
The early market reaction saw barely any movement for the Aviva share price, but Direct Line rose another 3% in early trading.
That really just cements the recent trend, with Direct Line shares up 58% since news of the talks first broke on 27 November.
The final terms of the agreement mean Direct Line shareholders will receive 0.2867 new Aviva shares, as well as 129.7p in cash, plus “up to 5% in the form of dividend payments” for each share.
The details are subject to board and shareholder approval. But the announcement says the Direct Line board intends “to recommend unanimously that Direct Line shareholders vote” to accept.
Direct Line gains
Aviva reckons the deal values Direct Line shares at 275p, 10% above the market price as I write. And it’s a 73% premium to the closing price on 27 November.
It looks like a cracking Christmas present for Direct Line shareholders. The bosses of both companies, naturally, are brimming over with enthusiasm.
I’ve even thought of buying some Direct Line shares a few times, despite its modest dividends. But it had been struggling, in a highly competitive insurance market blighted by inflation and adverse weather.
Still, the shares were on what I thought was an undemanding price-to-earnings (P/E) valuation based on forecasts for an earnings recovery. At least, before the Aviva boost.
Cash vs dilution
But as an Aviva shareholder, I really have to wonder if we’re getting a good deal here.
The Direct Line board did reject Aviva’s earlier approach, calling it “highly opportunistic“. It clearly wasn’t going down without a fight if it didn’t see enough cash on the table. So this final offer at least avoided a drawn-out hostile takeover battle.
Aviva completed a £300m buyback of its own shares in June 2024. And now it’s issuing new shares to pay, in part, for the takeover.
We have some dilution to get our heads round here, and broker forecasts will surely be up in the air for a while.
What next for dividends?
Almost as if to head off dilution concerns, Aviva said it “intends to declare a mid-single-digit percentage uplift in the dividend per share following completion.”
And the board “further intends to maintain the current guidance of mid-single digit growth in the cash cost of the dividend from this rebased level.“
For me, investing for long-term dividends, I think that’s enough to keep me on board. But I suspect concerns over the takeover price could mean further Aviva share price weakness.
