What price does DLG''s Board think is fair? And what can Aviva afford to pay? Today''s note deep-dives these topics, following-up on our first-take of the economics in Will they pick up the phone.
What does DLG''s board think the shares are worth?
On the face of it, it is surprising to see a 58% acquisition premium turned down. So investors are trying to assess how the DLG Board might be able to justify this (see our feedback note). What does the DLG Board think a fair price would be? On our best estimate of the ''management view'', including delivery against the 13% NIM target, we think the Board likely sees the shares as worth c.GBP2.80 on a stand-alone basis, and c.GBP3.10 including a fair share of expected synergies. This would of course represent a very high premium to the undisturbed price (90%); and just because the Board thinks this would be fair doesn''t mean it is the lowest price they would or should accept. But it may explain their response so far.
We think Aviva can make the deal work at GBP2.65 / share - refreshing our merger model here
We think there is room for Aviva to nudge up their offer to GBP2.65 and still deliver acceptable accretion. We refresh our assessment of the economics, including the DLG baseline, operating synergies, capital synergies, funding structure, and implications for capital returns. We now assume that the liquidity requirement for the deal can be met internally. We also believe that Aviva could finance the transaction without having to sacrifice its buyback - in fact, on our estimates, it makes the c.GBP300m buyback more sustainable on a run-rate basis.
Upgrading Aviva, Downgrading DLG
We no longer have downside for Aviva, and upgrade to Neutral. If the transaction proceeds, we think it could be value accretive. If the transaction does not proceed, shareholders may ask whether Aviva could return the funds that would have been used for the acquisition to investors instead, which we would see as a positive. We also downgrade...
