Aviva (LSE: AV.) shareholders are a affected person lot, with the shares struggling. Regardless of a profitable restructuring plus a forecast 7.5% dividend yield, the price is down 17% in 5 years.

With Aviva trying undervalued, I’d even been questioning if somebody would possibly make a takeover supply. However then Aviva turned the tables and approached Direct Line Insurance coverage Group (LSE: DLG).

On 23 December, we heard that the boards of the 2 corporations have reached an settlement for a really useful money and share supply for Aviva to purchase out Direct Line.

No change but

The early market response noticed barely any motion for the Aviva share price, however Direct Line rose one other 3% in early buying and selling.

That actually simply cements the latest pattern, with Direct Line shares up 58% since information of the talks first broke on 27 November.

The ultimate phrases of the settlement imply Direct Line shareholders will obtain 0.2867 new Aviva shares, in addition to 129.7p in money, plus “up to 5% in the form of dividend payments” for every share.

The small print are topic to board and shareholder approval. However the announcement says the Direct Line board intends “to recommend unanimously that Direct Line shareholders vote” to just accept.

Direct Line beneficial properties

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 appears to be like like a cracking Christmas current for Direct Line shareholders. The bosses of each corporations, naturally, are brimming over with enthusiasm.

I’ve even considered shopping for some Direct Line shares just a few occasions, regardless of its modest dividends. Nevertheless it had been struggling, in a extremely aggressive insurance coverage market blighted by inflation and antagonistic climate.

Nonetheless, the shares have been on what I assumed was an undemanding price-to-earnings (P/E) valuation primarily based on forecasts for an earnings restoration. A minimum of, earlier than the Aviva enhance.

Money vs dilution

However as an Aviva shareholder, I actually must surprise if we’re getting an excellent deal right here.

The Direct Line board did reject Aviva’s earlier method, calling it “extremely opportunistic“. It clearly wasn’t going down with no struggle if it didn’t see sufficient money on the desk. So this ultimate supply at the very least prevented a drawn-out hostile takeover battle.

Aviva accomplished a £300m buyback of its personal shares in June 2024. And now it’s issuing new shares to pay, partly, for the takeover.

Now we have some dilution to get our heads spherical right here, and dealer forecasts will certainly be up within the air for some time.

What subsequent for dividends?

Virtually as if to go off dilution considerations, Aviva stated it “intends to declare a mid-single-digit percentage uplift in the dividend per share following completion.”

And the board “additional intends to keep up the present steerage of mid-single digit development within the money price of the dividend from this rebased degree.“

For me, investing for long-term dividends, I believe that’s sufficient to maintain me on board. However I think considerations over the takeover price might imply additional Aviva share price weak spot.