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Nothing screams For Sale louder than a cheap sticker price. A number of listed UK companies seem priced for a quick sale. On Thursday, Britain’s largest private building society Nationwide announced it had provisionally agreed a takeover of Virgin Money.
The possible deal, apart from anything else, shows that challenger banks haven’t really lived up to their name. Virgin Money was the largest. Judging from its low return on equity, at under 10 per cent despite its reasonable cost to income ratio of 52 per cent, it lacked scale in a highly-competitive market. True, it had tried to consolidate the market with the acquisition of Clydesdale and Yorkshire Bank in 2018, but integration went slower than hoped, thinks Jefferies.
With a cost of equity in the teens, Virgin Money was destroying shareholder value. Even with the 35 per cent jump in the shares on Thursday, the stock price has crab walked sideways for five years.
Nationwide’s proposed cash offer represents a 40 per cent premium to the three-month average price. That may look healthy. But Nationwide isn’t really stumping up much to become the UK’s number two retail bank in terms of mortgages and savings. The offer pegs the bank at a valuation of 0.6 times tangible book value. Barclays paid a similar multiple for Tesco Bank, a fraction of the size.
Given that consolidation in this sector was a virtual certainty and Virgin was a decent prize, its board could perhaps have driven a harder bargain. The lender has more than 3 per cent of the mortgage market and 8.6 per cent of the credit card market. It also has £14bn of excess capital, enough to cover 150 per cent of 30-day outflows from its deposits, notes Numis.
This looks like a bold move by Nationwide boss Debbie Crosbie, in the job for just 18 months. She leapfrogs her UK rivals for a good price and need not compromise on Nationwide’s softly-softly principles. Nationwide plans no “near-term” lay-offs at Virgin Money. She will have to pay Virgin Holdings, top holder with 14.5 per cent, to keep the brand for another four years contractually.
The requirement to pay to run off the Virgin brand, long seen as a pseudo poison pill, may put off other potential bidders, including private equity. The low valuation should prompt others to look but bigger lenders could also face antitrust questions.
Challenger banks may not have delivered well for the UK banking market, or their investors. But Nationwide looks to have found itself a clever deal.