Virgin Money Holdings PLC (LON:VM.) has agreed to be taken over by CYBG PLC (LON:CYBG), the owner of Clydesdale Bank and Yorkshire Bank, for £1.7bn.
CYBG said in a statement on Monday that it has offered Virgin Money shareholders 1.2125 of its new shares for every Virgin Money share held.
The deal values Virgin Money at 371p per share, representing a premium of 19% to the closing price of 312p on May 4 – the last business day before the start of the offer period.
Virgin Money shareholders will own about 38% of the combined group on completion of the offer.
CYBG said it believes the deal will bring together the “complementary strengths of two successful challenger banks to create the UK's first true national competitor to the large incumbent banks”.
Benefits of Virgin Money-CYBG merger
The merged banking group is expected to generate £120mln of annual pre-tax synergies by the end of the 2021 fiscal year.
It is also expected to be earnings accretive and to improve capital generation that will support dividends.
“The strategic rationale is clear and offers both sets of shareholders real value, material earnings accretion, and enhanced capital generation for the benefit of all shareholders, together with both firms' customers, colleagues and local communities,” said CYBG chief executive David Duffy.
READ: Challenger offer: CYBG raises all-share bid proposal to buy rival Virgin Money by around 7%
Virgin Money chief executive Jayne-Anne Gadhia said: The combination of Virgin Money with CYBG will have greater scale to challenge the big banks. It will also accelerate the delivery of our strategic objectives, particularly the expansion of the products we offer to customers.”
Following completion of the deal, Duffy will remain chief executive of the combined group while CYBG chairman Jim Pettigrew and CYBG chief financial officer Ian Smith will also retain their positions.
The deal will create the UK's sixth largest bank with six million customers. CYBG plans to keep the Virgin Money brand.
"While some have suggested that the terms of the deal aren’t exactly generous I think the deal is less about the terms than whether it's a good fit for the two banks," said Michael Hewson, chief market anlayst at CMC Markets UK.
"On their own both banks are likely to struggle for market share while together they are a decent fit, and will probably be more durable in terms of competing on the same playing field."
Virgin Money was founded in 1995 and expanded the business in 2012 when it bought Northern Rock for about £747mln.
Muted market reaction
Shares in Virgin Money were flat at 353p in morning trading while CYBG shares were little changed at 306p.
"Today’s share price moves are considerably more muted to the original market reaction (VM shares were +9.89% on 8 May, first trading day after merger offer), suggesting that traders pretty much accepted the CYBG offer as a done deal and priced in much of the implied upside," said Artjom Hatsaturjants, research analyst at Accendo Markets.
"A muted reaction to the merger also reflected disappointment that it wasn’t sweetened by any cash (remember, cash is king in M&A), as well as the limited improvement on the original offer (+3.3% from implied 359p/share on 4 May)."
He added: "Much work remains ahead, especially to integrate the two banks’ IT systems, with the lesson of TSB/Sabadell IT meltdown not lost on anyone."
"With CYBG CFO projecting 30% savings from operational efficiencies, the fear is that the cuts may go too far and affect one part of the business that the banks absolutely have to get right."
-- Adds share price, analysts' comments, details of deal --