Nationwide Building Society reached an agreement with Virgin Money to purchase it for £2.9bn. This deal would make Virgin Money a stronger competitor to the UK’s largest banks.
After a failed attempt to enter business banking during the pandemic, the acquisition would also allow Nationwide’s share of the mortgage industry to grow.
Debbie Crosbie, chief executive of Nationwide, has made the boldest move to date in breaking the dominance of HSBC and its rivals Barclays, NatWest, Lloyds and Barclays on business and consumer banking.
National stated that the transaction will allow them to “accelerate their strategy and expand and deepen their products and services faster than they could achieve organically”.
The deal would see Nationwide offer 220p per Virgin Money, plus a final dividend of 2p, which is a 38 percent premium over the closing share price of the bank on Wednesday.
Virgin Money shares soared by 34 percent on Thursday. Its market capitalisation now stands at £2.8bn. Prior to the announcement, Virgin Money’s shares had dropped by a fifth over the last five years because it failed to live up to its promise of challenging the four major high street lenders.
Jayne-Anne Gadhia co-founded Virgin Money in 1995 as Virgin Direct. In 2018, Clydesdale & Yorkshire Banking Group bought Virgin Money for £1.7bn. The combined group retained the Virgin brand. The shares were valued at around 270p.
Virgin Money’s board said that it would “be minded” to make a recommendation if a firm deal was made. Virgin Group, Sir Richard Branson’s Virgin Group which holds a 14.5 percent stake in Virgin Money has also said it would be open to a deal.
Virgin Group stake in the company would be worth over £400mn if the deal goes through.
“I was thrilled to read about this deal. Gadhia stated that the price is reasonable, given the current challenges facing banks. “Nationwide will be a good place for it, and customers will benefit.”
Nationwide, with its 18,000 employees, stated that the combined group will have assets worth approximately £366bn, and would be the UK’s second largest provider of savings and mortgages. It added that the acquisition would allow it to “access a greater diversity of financing, particularly from business deposits”.
Benjamin Toms, a RBC Capital Markets analyst, said that the transaction could “potentially increase competition in the UK Mortgage and Savings Market” and would increase the building societies’ share of the UK mortgage market from 12,2 to 15,7 per cent.
Virgin Money will initially continue to be a separate company within Nationwide, but eventually the two businesses will merge and the Virgin Money brand will be retired in the next six-year period.
Virgin Money paid Branson £17mn last year for the use of Virgin’s brand. Nationwide is bound by contract to continue this for four more years.
The building society stated that it does not intend to “make any significant changes in the size of Virgin Money’s employee base in near-term”. Virgin Money employs approximately 7,300 people.
This would be a rare deal for a mutual to acquire a publicly listed company. The company is owned by more than 16mn of its members, who hold a savings account, current account or mortgage with it.
Virgin Money’s profits before tax for the year ended September were £345mn, after it took a higher than expected provision to cover bad loans.
Its performance in recent years has been affected by compensation payments that were higher than expected due to payment protection insurance mis-sold.
“Long-suffering investors are likely to be pleased with this offer,” said Gary Greenwood of Shore Capital. However, he noted that the deal valued Virgin Money 35 percent below its book value.
Virgin Money announced in January that it would increase the performance targets which underlie its executive bonuses following a revolt from shareholders.
David Duffy, the Virgin Money chief executive and Crosbie from Nationwide have previously worked together. Crosbie served as chief operating officer for four years before Duffy became the boss of CYBG.