Direct Line is set to back a sweetened £3.6billion takeover by Aviva valuing it at almost 75 per cent above its previous share price, after the insurance giant’s first offer was rejected.

It told shareholders on Friday its board would recommend a cash-and-share offer valuing Direct Line at 275p per share should Aviva make a formal offer, having turned down the Aviva's ‘highly opportunistic’ bid of 250p per share last week.

The bid comprises 129.7p in cash, 0.2867 new Aviva shares and dividend payments of ‘up to’ 5p per Direct Line share in aggregate, reflecting a mammoth 73.3 per cent premium to its pre-offer closing share price on 27 November.

The pair have already come to a preliminary agreement on the deal, which would see Direct Line shareholders would own approximately 12.5 per cent of the enlarged group.

But Aviva must formalise the offer by 25 December or walk away.

The Direct Line board says it is ‘confident’ in the firm’s prospects as a standalone business, and continues to have conviction in its leadership and strategy.

However, Direct Line says the potential offer ‘is at a value that it would be minded to recommend’.

It marks the third bid for the insurer in less than 12 months, with Direct Line having successfully fended off a takeover attempt by Belgian rival Ageas earlier this year.

The offer comes just weeks after Direct Line’s boss Adam Winslow, who took over at the beginning of March, announced that the business was cutting 550 jobs as part of a £100million cost-saving programme to revive its fortunes.

Aviva believes the deal has ‘strong strategic and financial logic’, while Direct Line’s board agrees it would ‘deliver significant synergies’ and create ‘substantial additional value for both sets of shareholders’.

However, some experts think the insurance takeover could lead to higher bills for customers.

Bid interest has helped propel Direct Line shares almost 30 per cent since the start of the year to 237.8p as of Thursday close. However, they have lost more than 20 per cent over the last five years.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: ‘Direct Line has hit some serious potholes lately.

‘Market share has been sliding, underwriting hasn’t exactly been flawless, and regulators have been knocking on the door.

‘But with a fresh leadership team at the wheel, the company has been working on a bold turnaround plan.

‘For Aviva, the price is pushing the limit of good value but snapping up Direct Line could be a strategic jackpot.

‘It cements their place as a heavyweight in the UK home and motor insurance markets and brings fresh opportunities to steer Direct Line’s transformation, while squeezing out efficiency gains from’