The Direct Line (LSE:DLG) share price jumped 7.6% on Friday (6 December), extending positive aspects from the earlier week, after a preliminary settlement was reached with Aviva (LSE:AV.).

Aviva, the UK’s largest insurance coverage group, will purchase Direct Line’s enterprise in a money and inventory supply price 275p per share. On Friday, the share rose accordingly, pushing in the direction of the proposed acquisition price.

The takeover saga

Direct Line’s administration had rejected Aviva’s first supply and described it as “highly opportunistic”, noting that they have been assured within the firm’s capacity to thrive by itself.

Nonetheless, Aviva’s persistence paid off with an improved bid, valuing Direct Line at £3.6bn. The 275p determine represents a major 73.3% premium over Direct Line’s pre-bid share price.

The deal, if finalised, would create a formidable insurance coverage large within the UK market. Regardless of accepting the supply, Direct Line’s board maintains confidence in its standalone prospects and the capabilities of its management workforce.

This potential takeover comes after a turbulent interval for Direct Line, marked by revenue warnings and management modifications, making the timing of Aviva’s bid notably strategic.

I’d held the inventory round two years in the past, however the enterprise began to falter and the sizeable dividend yield grew to become unsustainable. Primarily, it was a foul choose in a sector that hasn’t carried out overly nicely in the next rate of interest atmosphere. I bought a while in the past.

What occurs now?

Now that Direct Line’s administration has indicated its willingness to just accept Aviva’s improved supply, the FTSE 100 insurer should formalise its supply by Christmas Day, as per Metropolis takeover guidelines.

If Aviva proceeds, the deal will face scrutiny from regulatory our bodies, together with the competitors watchdog and the Financial institution of England’s insurance coverage supervisors because of the vital market share the mixed entity would maintain in motor and residential insurance coverage sectors.

Shareholders of each corporations might want to vote on the proposal. If accredited, the combination course of will start, doubtless leading to vital synergies but additionally potential job cuts past the 550 already deliberate by Direct Line.

The management workforce, together with CEO Adam Winslow, who just lately joined from Aviva, will doubtless play an necessary function in managing the transition and implementing the mixed technique.

What does this imply for traders?

The Direct Line share price is at present buying and selling at a modest low cost to the proposed takeover price, suggesting there’s little alternative for traders to purchase at the moment and profit.

And there’s the chance that the deal may collapse for a number of causes — therefore the low cost to the proposed takeover price. That will doubtless outcome within the share price collapsing from the present elevated ranges.

For context, the inventory was buying and selling as little as 147p only a few weeks in the past. It’s not unrealistic to think about the inventory falling again there if Aviva turns away from the deal or the regulator takes concern with the takeover.