There are two methods of Nationwide’s blockbuster £2.9bn takeover of Virgin Money.
The optimistic, glass half-full, interpretation is that that is one other heartwarming instance of how the mutual enterprise mannequin – placing the advantages of members above funds to shareholders – continues to flourish.
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Under this attitude, some 6.6 million Virgin Money prospects can now stay up for having fun with the type of advantages loved by greater than 17 million prospects of Nationwide, not least those that worth the flexibility to financial institution in a department.
Nationwide, as emphasised by its latest promoting marketing campaign starring actor Dominic West, is stressing its dedication to department banking at a time when the competitors is closing them.
The difficulties for challenger banks
The pessimistic, glass half-empty, view is that this takeover merely highlights how extremely tough the mid-tier banks have discovered it in taking up the entrenched market positions of the massive 4 industrial banks within the UK – NatWest, Barclays, HSBC UK and Lloyds Banking Group.
Not that way back, there have been hopes the massive 4’s grip in the marketplace can be damaged by a brand new wave of digital-only banks like Revolut, Atom Bank and Monzo.
At the identical time, there have been additionally hopes {that a} wave of extra conventional challenger banks, corresponding to TSB, Metro Bank and Virgin Money itself, would additionally problem the massive 4’s hegemony.
Those hopes have been properly and actually shattered.
In reality, it has been clear for fairly a while that the challenger banks weren’t going to realize that.
TSB was taken over by Sabadell of Spain as way back as March 2015 and subsequently got here a cropper following a botched migration to a brand new IT system that value the then chief government, Paul Pester, his job.
Aldermore fell to a £1.1bn takeover from FirstRand of South Africa in 2017. Metro Bank has been hobbled by a collection of unlucky episodes that date again no less than 5 years.
Now Virgin Money, itself a previous consolidator within the sector, has succumbed to a takeover.
A historical past of Virgin Money
The lender is itself an agglomeration of different banks – courting again to when Yorkshire Bank and Clydesdale Bank (as soon as owned by the outdated Midland Bank) have been merged almost 20 years in the past by their then proprietor, National Australia Bank, which in 2016 floated the financial institution on the London Stock Exchange underneath the moniker CYBG.
Two years later, CYBG acquired Virgin Money for £1.7bn, subsequently adopting the latter’s title on the idea that it loved higher buyer recognition.
The outdated Virgin Money itself was, at that time, no stranger to consolidation.
Launched by Sir Richard Branson’s Virgin Group as way back as 1995, underneath the banner Virgin Direct, its fortunes have been remodeled by the acquisition in 2012 of the stays of Northern Rock – the primary of the failed lenders rescued by the UK authorities on the outset of the worldwide monetary disaster in 2007.
So Nationwide is getting, with this deal, a group of no less than 4 establishments that have been as soon as stand-alone banks.
No one will know this higher than Debbie Crosbie, Nationwide’s chief government, who was as soon as an government of CYBG and who was there when it took over the outdated Virgin Money.
Ms Crosbie, who took over at Nationwide in 2021, additionally is aware of higher than most the challenges of operating a mid-tier lender as she succeeded Mr Pester at TSB in May 2019.
An undervalued deal
The glass half-empty view can be, sadly, strengthened by the value Nationwide is paying for Virgin Money.
The 220p-a-share takeover value represents a 38% premium to the value at which Virgin Money shares have been altering arms on Wednesday night.
Given that shares of Virgin Money have been languishing at simply 118p as not too long ago as October 2022, some might regard this consequently.
But the important thing metric to have a look at right here will not be the premium being paid however the low cost to Virgin Money’s tangible ebook worth of 360p-a-share.
Virgin Money will not be alone amongst UK lenders in seeing its shares buying and selling at a considerable low cost to ebook worth.
NatWest trades at round 70% of ebook worth, Lloyds at round 80% whereas Barclays trades at round simply 50%. Virgin Money is being taken out at 61% of ebook worth.
As Gary Greenwood, an analyst at funding financial institution Shore Capital, places it: “In our opinion, long-suffering shareholders are likely to welcome this offer, especially given its cash nature, but we feel it undervalues the group and that management could have perhaps driven a harder bargain.
“What it does indicate to us, is that administration had little religion round profitable execution of an natural technique, which may have doubtlessly yielded a a lot increased valuation if targets have been met.”
This is a vital level. One of the explanations Virgin Money’s shares have underperformed, a lot to the frustration of its likeable chief government David Duffy, is as a result of buyers have been sceptical it has the dimensions or scale to tackle the massive 4 with no nice deal extra funding.
NatWest after the takeover
Ms Crosbie might fare higher. That is partly as a result of, as famous, she is aware of what she is getting as a former CYBG government.
But additionally it is as a result of Nationwide – which plans to retire the Virgin Money model over time – is a a lot greater beast on account of this takeover.
It was already the UK’s second-largest mortgage lender, after the Halifax proprietor Lloyds, however now could be firmly established because the quantity two participant available in the market in each mortgages and financial savings merchandise.
John Cronin, analyst at Irish stockbroker Goodbody, sums it up thus: “Debbie Crosbie, who is well-known to us, is not short of vision or ambition and this is a sensible well thought through, yet brave, strategic move for Nationwide to take.
“But it is completely the precise transfer within the context of the technique set out since Ms Crosbie took the helm.”
Before the lender’s collapse, throughout the monetary disaster, James Crosby, the previous chief government at HBOS, used to object when journalists would recommend the financial institution had joined the ranks of the massive 4 and expanded it to a giant 5.
That accusation can’t be levelled at Nationwide as a result of, even after this transaction, it is going to be comparatively sub-scale in enterprise banking – a market during which, to guage by the expertise of the well-capitalised and well-managed Santander UK, the massive 4’s dominance is even tougher to interrupt than retail banking.
However, in relation to private banking, one can definitively say Nationwide is now pretty and squarely within the large league.
And these of a glass half-full persuasion will want it properly in protecting the massive 4 sincere.
Source: information.sky.com”