Richard Branson could bag a large profit on the sale of Virgin Money after receiving a £1.6bn bid for the bank seven years after he led a controversial £747m buyout of Northern Rock – later rebranded Virgin – following its taxpayer rescue.
Clydesdale and Yorkshire Bank Group (CYBG), which has proposed the deal,said it would create “a genuine alternative to the large incumbent banks”. The enlarged group would have 6 million customers.
Virgin Money shares climbed more than 9% to 341p on news of the CYBG approach, but a rise in the shares over recent days could interest City watchdogs. The shares climbed 15% from 270p to 312p last week.
Banking analysts said the deal would present “compelling industrial logic”. It would bring together a more traditional bank, CYBG, which has 169 branches, mostly in Scotland and Yorkshire, and serves 2.8m commercial and personal customers, with Virgin Money’s strong brand in mortgages and credit cards business, which has 3.3m customers.
Virgin Money has not yet agreed to the deal, which it described as a preliminary proposal, but its shares jumped 9% when the news emerged. Virgin Money shareholders would have 36.5% of the combined group.
Virgin Money traces its origins back to the 1995 launch of Virgin Direct, an investment business, but it was the takeover of Northern Rock in 2011 that propelled it into a large-scale operation.
As chancellor, George Osborne agreed to sell Northern Rock to Virgin Money nearly four years after nationalising the bank at the height of the financial crisis. The price paid by a consortium of investors, led by Branson, was half the amount the UK taxpayer had injected into bank. Osborne said at the time that the deal represented value for money for UK taxpayers.
Branson’s consortium included the US billionaire, Wilbur Ross, now Donald Trump’s commerce secretary. It bought the “good” half of the bank, including its branch network, funded by retail deposits. The “bad” part of Northern Rock – which included its fabled 125% mortgages – remained in public hands, although defaults and losses have been much lower than anticipated.
The coalition government brushed off calls by MPs, led by Chuka Ummuna, to remutualise the bank.
Virgin Money said in a statement: “The board of Virgin Money is in the process of reviewing this proposal. There can be no certainty either that an offer will be made nor as to the terms of any offer, if made.”
Shares in other mid-sized “challenger” banks rose sharply after CYBG’s prompted speculation that a long-awaited consolidation in the sector could become a reality.
Virgin Money’s rivals, including Metro Bank and OnesavingsBank, rose as investors bet on which might be next to merge in a buoyant British mergers and acquisitions market which has had record levels of activity.
Analysts said the initial offer was too low and would likely be rejected.
“We think Virgin shareholders will be lukewarm on the proposal,” said John Cronin at the broker Goodbody, adding that he expected a protracted takeover battle as the two parties jockey over price.
Under Takeover Panel rules CYBG now has until 4 June to table a formal proposal or walk away for at least six months.