Virgin Money seems sold on deal as CYBG sweetens offer

CYBG, the owner of Clydesdale and Yorkshire Bank, has upped the price of its proposed takeover approach for rival Virgin Money, which has agreed to push back the bid deadline as talks progress.

CYBG would offer 1.2125 new shares for each Virgin Money share, potentially giving Virgin Money shareholders a 38% stake in the combined group, up from the 1.1297 original offer made last month that would have led to a 36.5% ownership. The new proposed terms would value Virgin Money at 354p or £1.6bn based on the closing price at the end of last week.

Virgin Money agreed to push back the deadline for CYBG to return with a firm takeover offer to 1700 BST on 18 June or else walk away.

The board of Virgin Money has entered talks with its FTSE 250-listed peer and over other terms and conditions, while CYBG is in separate discussions with Richard Branson's Virgin Enterprises over the license paid for the Virgin Money brand, which is a pre-condition to the proposed combination. Currently, Virgin Money pays a fee equivalent to 1% of revenues for the use of the Virgin brand.

But boards of both companies were already in agreement that a merger would "create the UK's first true national banking competitor" to the large incumbent banks, with Virgin Money seeming to be fairly sold on the deal already, trumpeting a "compelling strategic rationale", with increased value for shareholders and offering the potential for "significant synergies" and cost savings.

Shares in CYBG rose 2% to 298.2p and Virgin Money's 0.6% to 345p on Monday.

Analysts at broker Shore Capital noted that the new offer is actually worth less than the original proposal was at the time of its announcement in May of 359p based on a then CYBG then share price of 318p, but added that "perhaps more relevant" is that the share of the combined business that will accrue to Virgin Money shareholders has increased slightly.

"Even on revised terms we continue to view the offer as being somewhat lightweight, providing little in the way of a takeover premium to our standalone fair value for Virgin Money of 350p. As such, the offer should perhaps be thought more of as a merger than a takeover, with both sets of shareholders set to benefit from any synergies (revenue and cost) subsequently realised," the analysts added, estimating cost synergies of at least 10% of the combined annual cost base of circa £1bn.

"Given statements from both companies note that the two boards are now in discussions we would suggest that there is goodwill on both sides of the fence for a deal to proceed. We therefore expect the offer to be made formal ahead of the revised deadline for doing so of 5pm on 18th June, although whether Virgin Money (and its shareholders) will press for a further sweetener remains to be seen. The lack of an up front cash incentive is notable and may be a source of further debate."