Virgin Money ATM in York
The deal would create Britain’s second largest mortgages and savings provider but further deplete the ranks of London-listed companies / Image source: Adobe
  • Offer pitched at 220p per share
  • Merger to create UK’s second biggest mortgage and savings group
  • Virgin Money suspends £150 million buyback

Virgin Money UK (VMUK) was the FTSE 250’s big winner on Thursday, shares in the UK’s sixth largest retail bank surging 36% to 215.8p on news it has agreed the key terms of a £2.9 billion takeover by Nationwide Building Society.

The mooted deal would create Britain’s second largest mortgages and savings provider but further deplete the ranks of companies listed on the London Stock Exchange.

Pitched at 220p per share, the all-cash offer represents a 38% premium to Virgin Money’s undisturbed share price.

Leeds-based Virgin Money said it would be ‘minded to recommend’ a firm offer made on the same financial terms to its shareholders and the deal also has the support of the brand owner, Virgin Group. As a result of the offer on the table, Virgin Money has suspended its £150 million buyback with immediate effect.

EXCITING OPPORTUNITY

The combined group would have total assets of around £366.3 billion and total lending and advances of around £283.5 billion, said the two companies in a statement.

Nationwide, whose humorous advert promising to keep branches open has ruffled the feathers of rivals, said that it will keep using the Virgin Money brand initially but it would be phased out over six years once the proposed takeover is completed.

Virgin Money CEO David Duffy insisted the potential transaction with Nationwide represents ‘an exciting opportunity to build on the significant progress we have made in becoming the only new Tier 1 bank in recent history. The combined scale and strength would expand our customer offering and complete our journey in the banking sector as a national competitor.’

Virgin Money has been one of the key names involved in the consolidation of the mortgage industry. Having acquired Northern Rock at the start of 2012, it was then gobbled up by CYBG in 2018 and merged into Clydesdale Bank in 2019. It’s now set to become part of Nationwide.

EXPERT VIEWS

AJ Bell investment director Russ Mould said that while mortgage rates have crept back up in recent weeks, the general consensus is that the Bank of England will start cutting base rates later this year and that should hopefully benefit those looking to move home or get on the housing ladder.

‘Nationwide is effectively pouncing on Virgin Money at a time when prospects are improving for its industry, albeit we’re still in a volatile period until the base rate starts to come down,’ said Mould.

‘This is slightly unusual as companies often buy rivals at precisely the wrong time – namely acquiring at the top of the market when everything looks good and then overpaying for deals, rather than taking bold steps and acquiring when everything looks bad and valuations are weak.

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‘Buying Virgin Money is not just about mortgages – the company will also boost Nationwide’s position in the deposit, credit card and business banking sectors. The brand will still be used for six years and we’re unlikely to see big branch closures for a few years. This all depends on Nationwide being able to get the deal over the line. It’s slightly out of kilter with its traditional roots but would not change its status as a building society.

‘A 38% bid premium is not overly generous and sits well below the 51% average seen last year with UK-listed takeovers. We might get interest from other parties now that Nationwide has thrown its hat into the ring or shareholders might push for a better price.’

Analysts at Jefferies added: ‘Many market participants had long considered the branding arrangements between the bank and Virgin Enterprises a potential stumbling block to an acquisition, and it is interesting to note that “as part of its longer-term integration strategy, Nationwide intends for the Virgin Money business to re-brand over time”. The deal looks to make a lot of strategic sense for Nationwide in terms of extension into cards and business current accounts and scale in core lending and deposits.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.

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Issue Date: 07 Mar 2024