Search Share Prices
Virgin Money ponders CYBG's £1.6bn takeover offer
CYBG, the owner of the Clydesdale Bank and Yorkshire Bank, has made an all-share takeover approach for Virgin Money that values its rival at £1.6bn, though some analysts said investors should expect a cash sweetener as part of the bid.
Virgin Money's board said on Tuesday they received the proposal on Monday evening and were in the process of reviewing the proposed offer of 1.1297 new shares for each Virgin Money share, which would value Virgin Money shares at 359p, representing a 15% premium to Friday's closing price of 312p. Virgin Money shareholders would own roughly 36.5% of the combined group.
Rumours of a potential merger had been doing the round last week, helping lift Virgin Money's shares more than 14% over the week and the offer was leaked to various news sources on the bank holiday Monday.
CYBG said it "recognises the strength and appeal of the Virgin Money brand" and has proposed to for the brand to "play a significant role in the combined group" if an agreement can be reached with Virgin Group Holdings Limited. Currently, Virgin Money pays a 1% revenue fee to Richard Branson's Virgin Group for the use of the Virgin Brand.
CYBG, which has a 175-year old brand history itself and was brought together under ownership of the National Australia Bank before being floated as a combined unit in London in 2016, said the proposed merger "would create the UK's leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent banks", with 6m personal and business customers.
"With this further strengthened customer franchise and national reach, CYBG believes the combination would deliver increased value for shareholders and wider benefits to other stakeholders," the FTSE 250 company said.
Using numbers from both company's latest annual results, the combined group would have total assets of roughly £83.3bn, total loans of around £68.7bn, deposits of close to £58.5bn and a market cap of about £4.4bn.
REACTION & ANALYSIS
Shares in Virgin Money vaulted 7.5% to 335.9p in early trading on Tuesday, while those in CYBG were up 0.5% to 319.8p.
Several analysts had highlighted the attractiveness of a takeover of Virgin Money as its shares had recently been trading near or even below its book value.
Exane BNP Paribas last week pointed to a likely earnings stream of over 10% return on tangible equity before any possible integration benefits being "an appealing proposition", though noted the recent cyber troubles at TSB after being acquired by Sabadell as "another reminder of the challenges of such operations, even if the current platform for VM is almost certainly a lot cleaner as a starting point".
Gary Greenwood at Shore Capital said consolidation was needed among challenger banks space as operators have the capacity to support much larger balance sheets but lack the scale to really compete with the larger operators. "Putting these two businesses together would create a new operators broadly twice the size of each of the standalone businesses, while also creating a challenger with a more broad-based product set."
The ShoreCap analyst said CYBG would bring capabilities in SME banking along with a branch network, while Virgin Money has arguably a better brand and strong intermediary mortgage franchise. "There would also no doubt be significant cost savings to be made, with the new entity having a combined cost base of just under £1bn (split roughly 2/3 CYBG and 1/3 Virgin Money)," he said, calculating that removing 10% of costs could be worth £640m versus an implied premium being offered to Virgin of £204m.
Broker Goodbody, having "for a long time" expressed concern in relation to VM's book value "due to credit card income recognition", said the proposed offer price represents a substantial premium to its own target price of 230p, but still expected VM's board to reject the initial offer to wrangle a cash sweetener as part of the offer. Analyst John Cronin thought this proposal in its current form "will be rejected, but that it paves the way for a part-cash part-share deal" at "no more than (and potentially less than) 359p per share", once CYBG has migrated its mortgage book to the internal ratings-based (IRB) approach.
"While this will drive VM's stock price further upwards today, we believe scepticism will set in among VM shareholders regarding what the shape of a full and final offer would look like," Cronin said, adding that the approach and "imminent" IRB migration should provide strong support for CYBG's stock price in the coming days/weeks, with any subsequent scepticism surrounding the shape of a final offer "could pave the way for CYBG to acquire VM at or below the 359p level".
JP Morgan Cazenove saw potential cost synergies of circa 15-25%, giving "some strategic rationale" as well as complementary businesses, CYBG's strong deposit base and Virgin Money's undervaluation on a stand-alone basis. "We don't see any regulatory hurdles to this deal, but access to the Virgin brand is a key consideration," analysts said, adding that CYBG's current account deposit franchise as "the key reason why Virgin Money shareholders should consider a merger favourably" as VM's own personal current account offering is likely to take a number of years.