Virgin Money, the sixth-largest bank in the UK, appears likely to be acquired by Nationwide Building Society, with the parties reaching a preliminary agreement. The 220p consideration appears fair in our view. It is a 5% premium to our stand-alone fair value estimate for no-moat Virgin Money, and a considerable 38% premium to the share price prior to the announcement, which has languished for years.
The consideration comprises a 218p cash payment plus a 2p dividend. The Virgin Money board has concluded that if a firm offer is made, it recommends that shareholders accept. We increase our fair value estimate in line with the indicative price of 220p or $A4.25 at current exchange rates.
Nationwide is the world’s largest building society and, with the acquisition of Virgin Money, would become the second-largest provider of mortgages and savings accounts in the United Kingdom. In addition to scale benefits, Nationwide believes the credit card and business banking offerings it picks up will help broaden its product offering and diversify funding quicker and more efficiently than it could organically.
Nationwide/Virgin Deal Should Go Ahead
Shares shot up and now trade at a modest 2.4% discount to the agreed price, implying the market expects the acquisition is almost sure to proceed. While we agree it is highly likely and don’t see a higher competing bid incoming, the modest upside from here against the downside risk if the acquisition doesn’t proceed should be considered.
Selling on the market and investing in another UK bank is an option for investors seeking exposure to the sector. Especially when other UK banks covered by my colleague Niklas Kammer, like narrow-moat Lloyds Banking Group, trade at a 37% discount to fair value and Barclays at a 19% discount.
Nathan Zaia is an equity analyst for Morningstar, focusing on the banking insurance sectors
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