Virgin Money's $2.3 Billion Merger May Spur Smaller-Bank Deals

(Bloomberg) -- Virgin Money Holdings U.K. Plc’s 1.7 billion-pound ($2.3 billion) takeover is likely to hasten consolidation as cost pressures squeeze smaller British banks.

The acquisition by British lender CYBG Plc announced Monday follows South Africa’s FirstRand Ltd.’s 1.1 billion-pound takeover of Aldermore Group Plc last year. That may spur deals as so-called challenger banks seek to diversify products, curtail expenses and take market share from Britain’s four biggest lenders, according to analysts and investors.

“There’s already been a fair amount of M&A activity in the sector, and there could be more to come,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown. “The Bank of England has withdrawn its cheap lines of credit, which is going to heap pressure on the challengers, and may drive further consolidation.”

Remaining challenger banks include OneSavingsBank Plc, Paragon Banking Group Plc and Metro Bank Plc, whose market value ranges from just under 1 billion pounds to about 3 billion pounds.

The withdrawal of the Bank of England’s Term Funding Scheme increased financing costs for the challenger banks that sprung up following the 2008 financial crisis in the hope of attracting customers disillusioned with traditional lenders. Progress has been slow in the last decade with Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Barclays Plc still dominating U.K. banking.

“Despite the bail-outs and all the regulatory backlash, the U.K. banking system still looks fairly oligopolistic,” Eric Moore, a portfolio manager at Miton Group, said in an interview. “More consolidation is likely. Regulation and the logic of scale economies make it probable, although there are not that many challengers left.”

The purchase of Virgin Money gives CYBG -- a consumer and business lender -- greater scale, potential cost savings and a broader presence on the high street. The combined company, which will have about 80 billion pounds of assets and will keep the Virgin Money name, could itself become a consolidator.

The merged company will “look to aggressively scale up in the U.K. via acquisitions as well as partnerships with technology companies,” John Cronin, an analyst at Goodbody Stockbrokers in London, wrote in a note to investors.

Virgin Money’s shares fell 2.2 percent to 347.9 pence as of 10:27 a.m. in London. CYBG, formerly the British division of National Australia Bank Ltd., made an offer in May. It slightly sweetened its all-stock proposal earlier this month by offering Virgin Money shareholders more of the merged company.

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