CYBG's big bid for Virgin Money

published 11 May 2018

"Being a UK challenger bank, it seems, is just a little bit too challenging," says Matthew Vincent in the Financial Times. TSB has spent two weeks struggling to make its IT systems work, while some shareholders are griping that Metro Bank "has spent too much on its chairman's travel and his wife's design business". Now Virgin Money, the bank in which Richard Branson's Virgin Group is still the biggest shareholder, is "looking for an exit". This week, the firm confirmed that it had "received a preliminary and conditional proposal" from CYBG, the owner of Clydesdale and Yorkshire Bank, to acquire its entire business in a £1.6bn all-share deal. If it goes through, it would mean Virgin Money's challenge to the UK high-street banks comes to an end just six years after the firm bought the remains of Northern Rock, which had been nationalised during the financial crisis.

A bigger, badder challenger

The logic of putting CYBG and Virgin together is that "it would create a much more effective challenger to the established order; a bigger, badder challenger than either individual bank could hope to become on its own, one with more than six million customers and a balance sheet approaching £70bn", says James Moore in The Independent. CYBG, which was spun off from National Australia Bank in 2016, "is stronger in lending to small and medium-sized businesses", says Christopher Thompson on Breakingviews. Virgin Money, on the other hand, would contribute a robust credit-card business. CYBG also has more branches, which helps it "suck in cheap deposits" its customers hold £11bn in current accounts, on which it paid a mere 0.05% interest last year. Virgin has accumulated just £415m of low-interest deposits. But there are also reasons for caution. Both banks are exposed to "the slowing UK economy and wobbly housing market", while TSB's fiasco illustrates the risks of integrating computer systems. CYBG also announced last month it would increase its provisions for paying compensation on mis-sold payment protection insurance (PPI) by £350m. Virgin has so far avoided the PPI woes afflicting many other banks.

Virgin should hold out for more

Under the proposed terms, investors will get 1.13 shares of CYBG for each Virgin Money share. As of Wednesday, that valued Virgin Money shares at about 360 pence a relatively modest 15% premium to its share price before the news broke. "CYBG may need to further sweeten its offer in order to get this deal over the line," Gary Greenwood of broker Shore Capital tells Bloomberg. And deservedly so, concludes Thompson. "A union makes sense commercially but Virgin shareholders are entitled to ask for a higher price."

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Pearson profits stop the rot for now

Shares in Pearson hit their highest level in 18 months after first-quarter results suggested the educational publisher was on track for a major turnaround, says Julia Bradshaw in The Daily Telegraph. Revenues rose by 1% in the three months to March, and boss John Fallon (pictured) said Pearson was expecting to report profit growth this year.

Fallon is trying to revive the struggling business by disposing of non-core assets and reducing the firm's level of debt "following a collapse in sales and a string of profit warnings over the past four years". The latest update follows the announcement in February that Pearson had returned to profit in 2017 after reporting a £2.5bn loss the year before. Net debt at the end of the first quarter fell to £0.6bn, down from £1.1bn a year ago.

Success not guaranteed

Still, justifying the 7% jump in the share price that followed the results is not simple, says Lex in the Financial Times. Bulls think the digital promise of "anywhere, anytime learning" will allow Pearson to open up new markets. This "might have stopped the rot in its US student textbook division", which accounts for 28% of profits: sales here might level out this year, the firm hopes.

But "after so many disappointments few can be confident about Pearson's forecasting". The big worry is that students will continue to revolt against high book prices. Cengage, Pearson's rival in the US, has a subscription model that costs a third of what students normally pay. "If Pearson's share is eroded, bears think this is unlikely to be offset by growth elsewhere."

City talk

"This was supposed to be a quiet annual meeting season," says Patrick Hosking in The Times.After "embarrassing" investor revolts in recent years, pay packets were supposedly becoming "less egregious" and non-executive directors firmer at "taming Tiggerish executives". Yet after Inmarsat voted against its pay report, and more modest rebellions erupted at Unilever, Pendragon, Ocado and William Hill among others, it's clear this "hasn't entirely gone to plan".

"The future of super-cheap transatlantic airfares is hanging in the balance as Norwegian Air and British Airways's owner IAG spar over a possible deal," says Stephen Wilmot in The Wall Street Journal. IAG boss Willie Walsh said last week that the company was "considering all its options" for the 4.6% stake it has built up in struggling Norwegian. Having made two rejected bids for the firm, Walsh emphasised the word "all", "as if to suggest IAG might just walk away". But this is a negotiating game. If Walsh thinks Norwegian is sure to go bust, "why buy a stake and initiate discussions"?

US private-equity group Apollo didn't say why it's backed away from a bid for British train and bus operator FirstGroup this week, says Chris Bryant on Bloomberg Opinion but "it's not difficult to imagine that Britain's politics were a factor". Apollo's interest "had drawn screams of asset-stripper'" from the Labour Party and trade unions. Those concerns are fair in some respects "private equity hasn't always acted in a way that would discourage such a description". Still, if they get it right, private-equity buyers can often improve the performance of the companies they own and "boy, could FirstGroup do with some of that".

Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.