(Dec 6): British insurer Direct Line is set to recommend a sweetened £3.61 billion (US$4.60 billion or RM20.3 billion) cash-and-stock takeover by Aviva if its bigger rival makes a formal offer, it said on Friday.

If the deal goes through, it would create a nearly £16.65 billion London-listed insurer, bigger than Legal & General and only slightly behind number one Prudential in terms of market value.

The new proposal values Direct Line at 275 pence per share, compared with a 250-pence cash and share bid that was rejected last week triggering speculation among analysts about a bidding war for the motor and home insurer.

The companies in a joint statement on Friday said they have reached a preliminary agreement on the financial terms of a potential acquisition.

Direct Line shareholders would get 129.7 pence in cash and 0.2867 new Aviva shares per Direct Line share, leaving them owning about 12.5% of the combined company.

Shares in Direct Line jumped 7% at the market open on Friday to trade at 253 pence, while Aviva stock dipped 0.5%.

Direct Line's shares soared more than 40% last week on news of the takeover interest. It had previously rejected a 239-pence-per-share takeover bid from Belgian rival Ageas in June.

According to British takeover rules, Aviva has until Dec 25 to make a firm offer or walk away.

"This represents a swift conclusion...at a fair price, which we see as the best possible outcome, as it avoids the need for Aviva to pursue a hostile bid," Jefferies analyst Philip Kett said in a note to clients.

Direct Line, under the leadership of CEO Adam Winslow who joined the company from Aviva in March, has made efforts to energise a business hurt by an underperforming motor insurance arm.

"A potential combination of Aviva and Direct Line in UK retail motor insurance and UK house insurance would significantly increase market concentration in these key markets and likely lead to more rational pricing," Berenberg analyst Michael Huttner said.

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