Virgin Money Soars After CYBG's $2.2 Billion Play for Bank

(Bloomberg) -- Virgin Money Holdings U.K. 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 businesses, 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 U.K. 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 enterprise 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.”

The U.K.’s Financial Conduct Authority is looking into Virgin Money’s share price after it surged more than 15 percent last week before CYBG made the preliminary offer. An FCA spokeswoman said the regulator conducts “surveillance across the market on a daily basis” and routinely looks at “unusual or sudden changes in price or volume.” The Financial Times reported the scrutiny of the regulator earlier on Tuesday.

Virgin Money had gained 9.1 percent to 341.7 pence at 4:02 p.m. in London trading, marking its biggest gain in almost two years. CYBG rose 1.1 percent to 321.4 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 Friday, 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.

Virgin Money told its shareholders “to take no action in relation to this proposal,” which it said it released without the consent of CYBG.

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