Nationwide gets the green light for its £2.9 billion offer to buy Virgin Money.
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What happened?
Nationwide has gotten the go ahead for a £2.9 billion takeover of Virgin Money. The Competition and Markets Authority (CMA) stated the building society will not reduce competition for credit cards and mortgages.
The competition watchdog also said the deal, which will be the biggest banking deal since the 2008 financial crisis, would not lead to a significant lessening of competition in the home loans market.
Image courtesy of: Virgin Money
More on the story
Virgin Money shareholders voted overwhelmingly in May 2024 in favour of the 220p-a-share deal, with 89% backing the deal. It could create Britain’s second largest savings and mortgage provider, after Lloyd’s Banking Group.
The overwhelming majority included backing from Sir Richard Branson, who owns a 14.5% stake and is Nationwide’s largest investor. If the deal does go ahead, he is set to receive £724 million from the takeover.
Virgin Money’s share price has increased by 35% to more than 215p since the banks announced the proposed deal earlier this year.
It comes after the CMA launched an inquiry in May 2024 to consider whether the proposed deal could result in a “substantial lessening of competition” within the UK market.
Debbie Crosbie, Nationwide’s CEO said, “We remain on course to receive all the necessary approvals to complete the deal in the final three months of this year.”
Virgin Money will keep operating as a separate legal entity within the Nationwide group in the medium term, and will have a separate banking license and board. However, after 4 years, the two lenders have agreed that the business will have two years to rebrand from the Virgin name.
Nationwide: A quick glance
What? Nationwide is the largest building society in the world, that offers its members a range of financial products from retail banking, to savings, mortgages, loans and investments.
Current CEO: Debbie Crosbie
Number of employees: Approximately 17,686
Number of locations: 686
An interesting fact: Nationwide’s full name is Nationwide Building Society. They’re a mutual, which means they’re owned by their 16 million members.
Why does Nationwide want to acquire Virgin Money?
Debbie Crosbie stated, “I believe this deal offers an exciting opportunity to create a more diverse business that delivers even more value to our members and will strengthen Nationwide financially....The acquisition of Virgin Money will bring the benefits of mutual ownership to more people in the UK and will enable us to provide further value to customers and members though its products and services.”
Once the deal is complete, the Nationwide Group-this includes Nationwide Building Society, Virgin Money and the other companies it owns- will be able to keep Virgin Money’s profits in the UK. They could use the extra money to improve current processes and systems across the services and products they offer to customers. Virgin Money generated pre-tax profits of £345 million in the last financial year. They also announced distributions of around £270 million to shareholders. Virgin Money’s financial performance is one reason why Nationwide want to buy them. Based on market analysts’ forecasts for Virgin Money’s pre-tax profits this year, the acquisition would mean a 17% return on the purchase price. This is especially good news, since Nationwide bought Virgin Money for £1.5 billion less, compared to its ‘book’ value. It should be noted that Nationwide’s actual gain will depend on how much Virgin Money’s net assets are worth when the deal is complete.
Image description: Nationwide’s CEO, Debbie Crosbie
Image courtesy of: Scottish Financial News
Buying Virgin Money also makes financial sense to Nationwide because doing so will lower their funding costs (these are the costs they face when they raise money on the financial markets to fund their lending). Lower costs ultimately mean they can invest more money into their products and services, as well as research and development. Furthermore, it could benefit members- through offering better mortgage rates and savings, compared to the market average. This can make them more competitive, compared to their other rivals within the market.
What implications could this story have?
The deal stands to create a combined group with approximately 700 branches and assets roughly equalling to £366.3bn.
Increased diversification. Nationwide primarily deals with savings and mortgages. It will mark the firm’s entry into the riskier business banking market. The buyout will also give Nationwide access to cheaper funding, business banking and the lender’s profits. This will enable it to scale and diversify its offerings to customers, and potentially widen its customer base.
Will current members want to continue on? The deal has come with some controversy. For example, Nationwide declined to give its 16 million owner-members a vote on the deal. The CMA stated it had “received concerns from individuals who were of the view that Nationwide’s members should have had the opportunity to vote on the acquisition of Virgin Money.” However, the regulator didn’t look into this issue during its investigation. It could mean that those members who do feel left out may not want to continue with the newly merged company, due to not being able to vote on the proposed deal.
Image courtesy of: EGI
The UK mortgage lender market
Lloyds Banking Group is the largest mortgage lender in the UK, and it has been the case for several years. In 2022, they lent out £52.7 billion, according to the Trade Association UK Finance.
During that same year, they had a 16.8% market share in terms of the amount lent out. This was a smaller market share, compared to the 18.1% market share they had a year prior.
Other major players within the mortgage lender market in the UK are:
NatWest
Nationwide
Santander
Coventry Building Society
With the Financial Conduct Authority’s introduction of the Consumer Duty rules for all financial firms, it means the customer will play a more important role in influencing financial regulators decisions. We can see this being played out with the CMA’s decision on Nationwide’s takeover. The FCA’s Consumer Duty, “sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first.”
The CMA concluded that the takeover deal will not lead to a substantial lessening of competition within this particular market. The CMA’s conclusion does make some sense. There are many firms within the UK market, which means customers will still have a wide array of lenders to choose from.
Image courtesy of: Which.com
Closing thoughts:
Unlike banking mergers in the past, this deal will be a gradual bringing together of the two businesses. This will give Nationwide adequate time to decide whether it is in the interests of their members to combine some systems or services. This is so minimal disruption is caused to the operations of the business, as well as to their members.
Should the deal be successful, it could cause other companies within the market to want to consolidate. If one or two do, maybe the CMA can also give them the green light to proceed. However, if more companies want to merge than the CMA would like, then this will likely cause some serious concerns. The future of the mortgage lending market could be questioned. Some customers may not want to receive support from any of the lenders, and this could cause the market to decrease in size, both in terms of customer base and the amount of lending they give out.
That’s it for this week!
Until next time, remember to stay curious!
What are your thoughts on this story? Do you think Nationwide’s takeover will be successful? Why/why not? What other implications could this story have? I’d love to know your thoughts. You can comment below, message me on any of my social media platforms, or send an email: hello@parahinsights.com
Further resources:
‘Nationwide gets green light for £2.9bn takeover of Virgin Money’-Article by The Guardian
‘Virgin Money shareholders vote for Nationwide takeover by big majority’-Article by The Guardian
‘Nationwide’s £2.9bn swoop of Virgin Money gets go-ahead from CMA’-Article by Yahoo Finance
‘Nationwide’s £2.9bn takeover of Virgin Money cleared by competition watchdog’-Article by This Is Money
‘An update on Nationwide’s offer to buy Virgin Money’-Article by Nationwide