Clydesdale and Yorkshire Bank owner CYBG (CYBG) is offering Virgin Money’s (VM.) shareholders a bigger stake in the proposed combination as the latter tries to get the deal over the line.

The revised offer emerged last night, just ahead of Monday’s deadline and will create a £4bn new bank. The new offer contains a 7% increase on the original share exchange ratio meaning Virgin Money shareholders would get 1.2125 CYBG shares for every Virgin share held.

This values Virgin at 354p a share, about a 3.4% premium to today’s 342.2p. Virgin Money shareholders would own around 38% of the combined group under the revised terms. The parties now have until 18 June to formalise a firm offer.

AJ Bell investment director Russ Mould says as this is an all-share transaction, the decline in CYBG’s share price since it was first announced in May means this new offer is actually worth less to Virgin shareholders than the original approach.

WHAT THE COMBINATION OFFERS

By joining forces, the combined bank would serve around six million retail and small to medium size business customers. However, Charmsol Yoon, analyst at investment bank UBS, says the combination will still have to deal with the lack of the government’s term funding scheme. Virgin Money made great use of this now defunct low cost funding solution, accounting for about 12% of the bank’s loans.

He adds that IT system migration can be complex and costly and also Virgin’s planned digital bank will require hefty investment. CYBG will need to make a decision on this as he thinks it still requires around £110m of investment to get off the ground.

MERGER NOT TAKEOVER

Shore Capital analyst Gary Greenwood says even on the revised terms he views the offer as being ‘somewhat lightweight’, adding that it should be thought of as a merger rather than a takeover.

Both sets of shareholders will benefit from revenue and cost synergies realised having previously estimated cost synergies of at least 10% of the combined annual cost base of about £1bn.

As the boards of both companies are in discussions, Greenwood says ‘there is goodwill on both sides of the fence for a deal to proceed’.

‘Whether Virgin Money (and its shareholders) will press for a further sweetener remains to be seen’ says Greenwood. ‘The lack of an up front cash incentive is notable and may be a source of further debate’.

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Issue Date: 04 Jun 2018