Virgin Money soars after rival’s $2.2 billion play for bank

Bloomberg

Virgin Money Holdings UK Plc, soared after receiving a 1.6 billion-pound ($2.2 billion) preliminary offer from rival CYBG Plc, as potential consolidation among smaller banks accelerates.
CYBG, which lends to consumers and small-medium enterprises, is eyeing the Richard Branson-backed bank to give it greater scale, potential cost savings and access to its presence on the high street. Virgin Money’s board is still reviewing the proposed deal while CYBG, formed from a split of National Australia Bank Ltd.’s UK assets, said there was no certainty a formal offer would be made.
“The strategic logic of such a combination are clear,” Edward Firth, an analyst at Keefe, Bruyette and Woods in London said in a note to clients. A combined entity would offer “increased critical mass including a more extensive branch network, small and medium-sized expertise and a more stable branch based funding source.”
A merger would add to deal-making among the handful of smaller so-called challenger banks as they seek to raise funds and steal business from the Britain’s four biggest lenders that control most of the market. A sale of Virgin Money, a mortgage lender that’s almost twice as profitable by one measure than CYBG, would follow FirstRand Ltd.’s 1.1 billion-pound acquisition of Aldermore Group Plc this year and Shawbrook Group Plc’s takeover in June.

Cost Savings
“A deal makes a lot of sense,” said John Cronin, an analyst at Goodbody. “It should drive significant funding cost synergies and material operating cost synergies – as well as mitigate against the need for Virgin Money to incur substantial digital platform development spend given that CYBG has a digital bank.”
Virgin Money had gained 8.4 percent to 338.7 pence at 10:12 a.m. in London trading, the highest in more than a year. CYBG rose 1.5 percent to 322.8 pence.
Under the terms of the preliminary deal, investors would receive 1.13 shares of CYBG for each Newcastle upon Tyne-based Virgin Money share they own. At each bank’s closing price, that would value Virgin Money shares at 359 pence, a 15 percent premium.
“CYBG may need to further sweeten its offer in order to get this deal over the line and would not be surprise to see Virgin Money stand its ground,” said Gary Greenwood, analyst at Shore Capital Group Ltd said in a note to clients.
Mortgages accounted for about 82 percent of Virgin Money’s 41.1 billion pounds of assets at the end of 2017, an annual report shows. The lender’s return on tangible equity, a measure of profitability, was 14 percent for the period compared with 7.5 percent at CYBG, reports show.