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Virgin Money shares jump as it mulls proposed £1.6bn takeover bid from CYBG

Last updated: 08:31 08 May 2018 BST, First published: 07:31 08 May 2018 BST

Virgin Money
The proposed bid represents a 15% premium to Virgin Money's closing price on Friday

Virgin Money Holdings (LON:VM.) is reviewing a proposed takeover bid from CYBG PLC (LON:CYBG), the owner of Clydesdale Bank and Yorkshire Bank.

The challenger bank, backed by billionaire Richard Branson, said CYBG has proposed giving investors 1.1297 of its shares for each Virgin Money share, representing 36.5% of the combined group.

The potential deal would value Virgin Money at about £1.6bn and offers shareholders a 15% premium to the closing price on Friday.

Virgin Money advised shareholders to take no action in relation to the proposal as there can be no certainty that a formal offer will be made.

Shares in Virgin Money jumped 7.7% to 336p and CYBG gained 1.1% to 321p in morning trading

CYBG says merger would create 'increased value for shareholders'

CYBG said the possible takeover would create “substantial synergy potential” as the UK’s leading challenger bank.

“The combination would provide a powerful full-service banking offer, including leading digital and mobile banking services, for 6 million personal and business customers, bringing together the complementary strengths of CYBG and Virgin Money,” CYBG said.

“With this further strengthened customer franchise and national reach, CYBG believes the combination would deliver increased value for shareholders and wider benefits to other stakeholders.”

Shares in Virgin Money jumped more than 6% last week after the bank shrugged off a competitive mortgage market to deliver a 10.4% increase in the mortgage book in the first quarter. 

READ: Virgin Money shares rise as 2018 guidance left unchanged after strong first quarter

Bid price could be too low, says analyst

RBC Capital Markets said: "If Virgin Money is successful in building the digital bank from scratch we see a return on tangible equity of 15% in 2023 and a theoretical valuation of 485p - and therefore the bid price could be seen as too low."

"There is risk in entering the current account market organically - but equally there is integration risk with CYBG."

RBC rated Virgin Money at 'underperform' with a target price of 250p, citing the company's "lack of diversification" in funding as the Bank of England's Term Funding Scheme ends this year and pressures deposit pricing and growth.

The brokerage believes a merger would make "strategic sense" for both Virgin Money and CYBG but it could be better to wait.

"Both banks are front runners for the Royal Bank of Scotland Group PLC's (LON:RBS) Alternative Remedies package, which provides substantial equity to build in the business current account market," it said.

"Presumably a combination of these two banks means they could only access one award from this source." 

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