By Geoff Percival
Virgin Money is expected to reject an initial £1.6bn (€1.8bn) takeover offer from rival British ‘challenger’ bank CYBG, which is led by former AIB boss David Duffy.
Richard Branson is reviewing the bid that could turn the fledgling lender he founded almost 25 years ago into one of Britain’s biggest banks.
Shares in both banks rose yesterday; Virgin’s substantially by over 9% and CYBG by over 1%.
However, while analysts said the deal made logical sense — combining CYBG’s more extensive branch network with Virgin’s stronger brand — most suggested the initial offer was too low and would likely be rejected.
“We think Virgin shareholders will be lukewarm on the proposal,” said Goodbody’s John Cronin, adding that he expected a protracted takeover battle could now happen as the two parties jockey over price.
“We had expected this deal to happen, but not so soon,” he said.
“A 15% premium looks light relative to recent takeover premiums paid for UK challenger banks, especially in light of arguably greater synergy potential in a tie-up between Virgin Money and CYBG,” said Davy’s Stephen Lyons.
These smaller banks rose to prominence to meet a shortfall in small business lending left by the bigger banks, which retreated after the financial crisis to rebuild their battered balance sheets.
The challenger banks have succeeded in peeling some business away from heavyweights such as Lloyds and RBS, but in turn face their own threat from nimbler digital-only rivals and the rising costs from tighter regulation.
Virgin Money is investing heavily in a new digital offering while CYBG already has a digital and mobile banking platform called ‘B’.
CYBG, owner of Clydesdale and Yorkshire Bank, made its London market debut in 2016 after it was spun off by National Australia Bank.
A successful merger would create Britain’s sixth largest bank, according to analysts.
Under its takeover plan, Virgin Money would own about 36.5% of the combined company.
Virgin Money shareholders would receive 1.13 new CYBG shares for each Virgin Money share.
Additional reporting Reuters