Virgin Money shareholders could be getting a better deal as part of a £2.9bn takeover bid from Nationwide, analysts have said, ahead of a crucial vote on the offer next week.
The two lenders agreed to an all-cash takeover in March, which stands to be the biggest UK banking merger since the financial crisis and create the country’s second-largest provider of mortgages and savings.
The building society’s offer must now be approved by at least 75 per cent of Virgin Money’s shareholders. The result of their vote will be revealed at an investor meeting next Wednesday (22 May).
Nationwide’s deal is set to deliver Virgin Money shareholders 218p per share and a 2p dividend. However, some analysts and investors have said the bank’s management could have driven a harder bargain.
In a note on Tuesday, analysts at Stifel-owned KBW reiterated their recommendation from April that investors reject the current offer, noting “increasingly public shareholder disquiet”.
They signalled that Nationwide could have reasonably valued Virgin Money at 250p per share, calling it a “leading quoted UK challenger bank”.
Nationwide’s deal marked a 38 per cent premium to Virgin Money’s stock price immediately before the offer was first announced and 40 per cent to its average price over the previous three months.
However, it also represented a 35 per cent discount relative to the value of Virgin Money’s mortgages and other loan assets.
Gary Greenwood, an analyst at Shore Capital, told City A.M. he thought this figure had driven most of the “investor disappointment”.
“It effectively implies that management saw no prospect of delivering returns above cost of equity in a reasonable time horizon and so didn’t back their own strategy,” he added.
“This is ballpark similar to other recent deals but still a poor outcome in absolute terms,” Greenwood said, citing Barclays’ purchase of most of Tesco Bank and Coventry Building Society’s deal to acquire The Co-operative Bank within the last few months.
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A senior banker at one of Nationwide’s biggest rivals told City A.M. that while he did not expect Virgin Money shareholders to block the deal, a significant number would reject the “low” price.
He pointed to TSB’s Spanish owner Banco Sabadell recently rejecting a takeover proposal from its bigger domestic rival BBVA on the grounds that it was too cheap.
BBVA last week launched a hostile takeover bid by taking its proposal directly to Sabadell’s shareholders.
“This naturally raises the question of whether Nationwide’s offer could be improved, given that it is so far below book value,” Benjamin Toms, an analyst at RBC Capital Markets, told City A.M.
The banker also cited improving investor sentiment for banking stocks, with the likes of Natwest and Barclays being among the FTSE 100’s best-returning companies so far this year.
“UK banks in general performed better than expected in the first quarter, and the macro-economic environment has improved, meaning that the outlook for UK bank profitability in 2025 is better than Virgin Money would have expected when Nationwide made its offer,” Toms added.
Richard Branson’s Virgin Group, the bank’s top shareholder with a 14.5 per cent stake, has said it will back the merger.
But some other holders pose a threat. Australian firm Allan Gray, Virgin Money’s largest independent investor with a 10 per cent stake, said earlier this week that the deal was “likely to sell shareholders very short” and slammed Nationwide for denying members a say.
Its chief investment officer Simon Mawhinney did not comment on whether Allan Gray would vote for or against the deal.
Virgin Money’s shares have been trading at around 215p, roughly in line with the offer price, since Nationwide first made the bid, signalling investors’ confidence that the deal will go ahead.
“I think the vote will reach its target, not least because there appear to be no other potential bidders waiting in the wings to put pressure on Nationwide to up the price,” Greenwood said.
However, KBW analysts said they believed there are “a number of possible alternative interested parties, including private equity”. They said the most obvious potential bidder is Barclays but noted that it “remains myopically focused on buybacks”.
A Virgin Money spokesperson commented: “The offer will compensate shareholders for the fundamental value of the Virgin Money Group and provide an opportunity for our shareholders to realise the medium-term value from delivery of the standalone strategy on an accelerated basis, in cash.”
Nationwide cited a comment made by its chief executive Debbie Crosbie in March, saying the tie-up “strengthens Nationwide and means we can offer more value and broader services for our current and future members”.