LONDON (Reuters) - Mid-sized bank CYBG (CYBGC.L) has agreed to buy Virgin Money VM.L in a 1.7 billion pound ($2.3 billion) all-share deal that it said will create Britain’s sixth-largest bank by assets and a stronger challenger to the country’s top four lenders.
Britain’s biggest bank merger since the financial crisis was clinched by this month’s sweetened bid from CYBG and will give Virgin Money shareholders, which include entrepreneur Richard Branson, about 38 percent of the combined group.
The merged company will be about twice the size of its largest rival among Britain’s smaller banks and be able to draw on the firepower of the Virgin brand, for which it will pay a royalty.
CYBG Chief Executive David Duffy will lead the enlarged lender, with Virgin Money CEO Jayne-Anne Ghadia acting as a senior adviser for an unspecified period, as it throws down the gauntlet to the sector’s big guns.
“The combination of CYBG and Virgin Money will create the first true national competitor to the status quo in UK banking, offering a genuine alternative for consumers and small businesses,” Duffy said in a statement.
Virgin Money shares were down 2.3 percent to 347 pence at 1053 GMT after initially rising by a similar amount. CYBG shares, which dictate the value of the deal, were down 1.4 percent at 302 pence.
Shareholders of both banks still need to approve the takeover, but John Cronin, analyst at stockbroker Goodbody, said both sides are likely to agree to the terms.
“Ultimately, we believe this is a great deal for both sets of shareholders and we expect it should receive their support,” he said.
Virgin Money investors will receive 1.2125 CYBG shares per Virgin Money share. Branson owns 35 percent of Virgin Money.
The agreement comes after over a month of talks between the two lenders and beats the Monday afternoon deadline for CYBG, owner of Clydesdale and Yorkshire Bank, to make a firm offer or walk away under British takeover rules.
The banks said they expect to benefit from 120 million pounds in annual pretax cost savings, helped by the loss of about 1,500 jobs, which would leave the group with a headcount of around 8,000.
The Unite union expressed “deep unease” about the announced cuts, its national officer Rob MacGregor said, adding that it was seeking an urgent meeting with Duffy.
While banding together will help the duo to fight competitive pressures from established players and tech-savvy newcomers, they face a tough task if they are to take on the so-called Big Four of Lloyds (LLOY.L), RBS (RBS.L), HSBC (HSBA.L) and Barclays (BARC.L).
The new lender would be the main bank for only 2 percent of retail banking customers, compared with about 24 percent for market leader Lloyds, according to data from industry body RFi Group. (tmsnrt.rs/2Jcwir8)
CYBG Finance Director Ian Smith told Reuters by phone that the new bank will be “better rather than bigger”, leveraging technology to improve services for its enlarged customer base.
“Really the battleground for us is customer experience,” he said.
Virgin Group CEO Josh Bayliss said CYBG is the partner Virgin Money needs to continue to grow.
“We ... look forward to helping the combined business rebrand to Virgin Money,” he said.
CYBG will pay a fixed royalty to keep the Virgin Money brand, starting at 12 million pounds in the first year and rising to 15 million pounds in the fourth year.
Like Duffy, CYBG Chairman Jim Pettigrew and finance chief Smith will retain their roles in the combined group.
Additional reporting by Lawrence White; Editing by Keith Weir and David Goodman