Insurer Direct Line has accepted an improved offer from its larger British rival Avivain a deal valuing the business at £3.6bn.
Aviva, the UK’s biggest insurer, has reached a tentative deal to take over Direct Line after submitting a third cash and stock offer valuing London-listed Direct Line at 275p per share.
Aviva had hers first offer, at 250p, rejected last weekand earlier this week raised it to 261p per share.
Direct Line’s board, led by chairman Danuta Gray, rejected Aviva’s first approach last month, saying it was “highly opportunistic” and “significantly” undervalued the business.
In a joint statement on Friday, Direct Line’s board said it remained “confident” in its prospects as a stand-alone company and “continues to have the conviction and ability of the newly formed management team to deliver on the announced strategy”.
However, the board added that the proposed price meant it intended to recommend that shareholders accept a formal offer and that the combined company would provide “an opportunity to achieve significant synergies creating significant additional value for both groups of shareholders”.
A takeover by Aviva would create a group dominating more than a fifth of the car insurance market and 15% of the home sector.
Under City takeover rules, Aviva has until 5pm on Christmas Day to submit a firm offer for a direct line or walk away.
The deal is likely to draw the attention of the competition watchdog and insurance watchdogs at the Bank of England.
Directline, based in Kent, said earlier this month that plans to cut 550 jobs as part of recovery plan aiming to save £50m next year. It lost almost 400,000 auto insurance customers last year. Adam Winslow joined as chief executive in March from Aviva, where he led the UK and Ireland non-life business.
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In February and March Direct line rejected two takeover approaches from Belgian insurer Ageasthe second valued it at 3.2 billion pounds, or 239 pence a share, saying it was “uncertain and unattractive” to shareholders.
The British insurer was spun off from Royal Bank of Scotland in 2012. and listed on the London Stock Exchange two years later.
Aviva has sold businesses in France, Italy, Asia and elsewhere to focus on the UK, Ireland and Canada under chief executive Amanda Blanc. In March it announced it was returning to the Lloyd’s insurance market with the £242m purchase of Probitas and closed the deal in July.