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Nationwide Building Society has reached a preliminary agreement to buy Virgin Money for £2.9bn, in a deal that would create a more powerful challenger to the UK’s biggest banks.
The acquisition would allow Nationwide to move into business banking after an aborted attempt during the pandemic and also expand its share of the mortgage market.
The proposed tie-up is the most ambitious move yet by Nationwide’s chief executive Debbie Crosbie as the country’s largest building society tries to break the grip of HSBC, Lloyds, Barclays and NatWest on consumer and business banking.
Nationwide said the transaction would allow it to “accelerate its strategy and broaden and deepen its products and services faster than could be achieved organically”.
Under the terms of the deal, Nationwide would offer a total of 220p for each Virgin Money share, including a 2p final dividend, a 38 per cent premium to the bank’s closing share price on Wednesday.
Shares in Virgin Money surged 34 per cent on Thursday, giving it a market capitalisation of £2.8bn. Before the deal was announced, they had fallen by about a fifth in the past five years as it failed to fulfil its promise to challenge the big four high street lenders.
Virgin Money was co-founded as Virgin Direct by Jayne-Anne Gadhia in 1995. It was bought by Clydesdale & Yorkshire Banking Group for £1.7bn in 2018 in a deal where the combined group kept the Virgin brand. At the time, the shares were priced around 270p.
The board of Virgin Money said it would be “minded” to recommend a firm offer if one was made. Sir Richard Branson’s Virgin Group, which owns a 14.5 per stake in Virgin Money, also indicated it would support a deal.
If the deal is approved, Virgin Group’s stake would be worth more than £400mn.
“I was delighted to read about the deal. It is a decent price given the challenges faced by banks today,” Gadhia said. “Nationwide is a good home for it and will benefit customers.”
Nationwide, which has 18,000 employees, said the combined group would have assets of about £366bn and be the second-largest provider of mortgages and savings in the UK. The acquisition, it added, would give it “access to greater diversity of funding, notably from business deposits”.
Benjamin Toms, an analyst at RBC Capital Markets, said the transaction would “potentially lead to increased competition in the UK mortgage and savings market” and increase the building society’s share of the mortgage market from 12.2 to 15.7 per cent.
Virgin Money would continue to operate as a separate business within Nationwide initially, although eventually it would be integrated and the brand retired over the next six years.
Virgin Money paid Branson £17mn for use of the Virgin brand last year. Contractually, Nationwide will have to continue to do this for another four years.
The building society said it did not plan to “make any material changes to the size of the Virgin Money employee base in the near term”. Virgin Money employs about 7,300 people.
The deal would also be a rare acquisition of a listed company by a mutual, which is owned by its more than 16mn members who have a current account, mortgage or savings with the company.
Virgin Money’s pre-tax profits for the 12 months to the end of September fell to £345mn after the lender took a larger than expected provision for bad loans.
In recent years, its performance has also been hit by higher than expected compensation payouts linked to mis-sold payment protection insurance.
“Long-suffering shareholders are likely to welcome this offer,” said Gary Greenwood, an analyst at Shore Capital, although he pointed out that the deal valued Virgin Money at a 35 per cent discount to its book value.
In January, Virgin Money said it would raise the performance targets that underpin its executive bonuses, following a rebellion from shareholders.
Nationwide’s Crosbie and Virgin Money’s chief executive David Duffy have worked together previously. When Duffy joined as boss of CYBG in 2015 Crosbie was chief operating officer, a role she held for four years until she left to run TSB Bank.
