Virgin Money share price rise attracts City watchdogs’ scrutiny
Shares in CYBG and Virgin Money rose today as investors welcomed the latest consolidation in the British challenger bank sector, although City regulators are understood to be eyeing share price movements before the offer was revealed.
CYBG announced its all-share offer on Monday night, following building speculation that Virgin Money could be an acquisition target. Virgin Money shares rose by more than 15 per cent during the course of last week after first-quarter results in which guidance and outlook remained unchanged.
The moves were large enough to attract scrutiny from the Financial Conduct Authority (FCA), the Financial Times reported. The banks have not yet been contacted by the regulators.
The FCA said: “We dont comment on specific cases but we conduct surveillance across the market on a daily basis and routinely look at unusual or sudden changes in price or volume.”
Read more: Branson-backed Virgin Money receives takeover bid from Clydesdale owner
Virgin Money and CYBG declined to comment.
CYBG's offer came at a premium of 15 per cent above Virgin Moneys closing price ahead of the bank holiday, valuing the challenger bank at £1.6bn. Shares in Virgin Money rose by 9.89 per cent today to reach 343.3p, while shares in CYBG, the owner of the Clydesdale Bank, Yorkshire Bank and B brands, rose by 1.13 per cent today.
Whatever the prospects for regulatory action, analysts said that CYBG faces the prospect of being sent back to the drawing board at least temporarily by Virgin Money investors. “There is no certainty a formal offer will be made,” CYBG said in its announcement. It has until 4 June to make a firm offer under takeover rules.
Cian Harty, an analyst at stockbrokers Goodbody, said: “We think this proposal in its current form will be rejected, but that it paves the way for a part-cash part-share deal at no more than 359p per share.”
Ian Gordon, an analyst at Investec, said: “CYBG would benefit from Virgins capital surplus, superior brand and lower cost operating model. The logic is clear; the offer looks inadequate.”
Read more: CYBG on the look-out for deals, but keeps schtum on Co-op Bank
He added that cost synergies between the two firms could reach between 10 and 20 per cent.
The merger would position a combined entity as one of the largest among the challenger banks trying to take market share from the big six banks which still dominate the UK industry.
The combined entity would have retail deposits of almost £45bn, leapfrogging other banks in challenger space, according to data from stockbrokers Goodbody – although it would remain far off the largest banks. For instance, Royal Bank of Scotland (RBS) counts retail deposits of £164bn, while Lloyds Banking Groups various brands combine to a gargantuan £253bn.
A merger could also make CYBG a more attractive bidder for the pot of cash RBS has been forced to put up to address competition concerns over its state bailout during the financial crisis. Applicants for the awards of up to £120m must show to an indpendent panel that they will boost competition for business banking. CYBG currently has £7bn in business loans.
CYBG will announce its annual results on Tuesday 15 May.
The potential tie-up between CYBG and Virgin Money follows South African lender Firstrands takeover of business and retail bank Aldermore and the private equity-backed takeover of Shawbrook.
However, Dan Jones, partner and head of digital at consultants Capco, said talk of further consolidation in the challenger sector may be overdone.
He said: “With the breadth of offerings available, traditional banks would need to acquire several challenger or specialist brands if they are to truly take on the market, and in reality this is not feasible.”
Read more: Shares in Clydesdale Bank owner CYBG slump after bank takes new PPI hit
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