CYBG expected to sweeten Virgin offer after share slide
Stock tumble of almost 8% devalues initial proposal for rival bank
CYBG is likely to have to make an improved offer to take over rival bank Virgin Money after a slump in its stock devalued its all-share proposal, according to analysts and people close to the prospective deal.
The company behind Clydesdale and Yorkshire banks confirmed earlier this month that it had approached Virgin about a deal that initially valued it at £1.62bn. However, shares in CYBG have fallen almost 8 per cent since the offer was announced, knocking roughly £125m from the value of its stock.
Shares in Virgin, meanwhile, have made further gains after jumping on news of the approach, meaning it is trading at a premium to the preliminary proposal.
Several bankers familiar with the situation said they expected CYBG to improve its offer and potentially add a cash component to the deal.
They said that while CYBG’s position was strengthened by the lack of viable alternative bidders for Virgin, a sweetener would be required to push a deal over the line.
Gary Greenwood, analyst at Shore Capital, said CYBG’s initial proposal looked like a “lowball” offer, but suggested changes to the way the FTSE 250 group calculates credit risk could make it easier to fund a cash component.
CYBG said it was in the “final stages” of the regulatory process to move to a new model that was expected to strengthen its balance sheet and leave it with several hundred million pounds of excess capital.
The recent slide in CYBG’s share price was prompted in part by a disappointing half-year update, with the bank falling to a loss and warning of ongoing weakness in the mortgage market.
However, one banker suggested the weak results strengthened the case for a merger, highlighting the need for scale to take on the big four lenders — Lloyds, HSBC, Barclays and RBS.
Economic slowdown combined with rising competition and higher funding costs have encouraged a renewed focus on M&A activity across the UK’s so-called “challenger bank” sector in recent weeks. News of CYBG’s approach boosted shares in other potential targets or consolidators, such as One Savings Bank.
Under the UK Takeover Code, CYBG has until June 4 to announce a firm intention to make an offer for Virgin, or it will not be allowed to make a bid for another six months.
CYBG and Virgin declined to comment.