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Shares in Virgin Money are flat in London today as the challenger bank says it has accepted a £1.7b all-share merger offer from CYBG, valuing Virgin Money at 371p a share, representing a 19% premium to VM share price on 4 May, before the official merger approach was made. In return, Virgin Money shareholders are to receive 38% stake in the new combined entity.
Today’s share price moves are considerably more muted to the original market reaction (VM shares were +9.89% on 8 May, first trading day after merger offer), suggesting that traders pretty much accepted the CYBG offer as a done deal and priced in much of the implied upside. While there is still some space to the implied 371p/share offer, investors are not rushing to fill the gap.
A muted reaction to the merger also reflected disappointment that it wasn’t sweetened by any cash (remember, cash is king in M&A), as well as the limited improvement on the original offer (+3.3% from implied 359p/share on 4 May). Still, given the gruelling competitive environment for challenger banks, investors were relieved that the merger was going through at all.
Much work remains ahead, especially to integrate the two banks’ IT systems, with the lesson of TSB/Sabadell IT meltdown not lost on anyone. With CYBG CFO projecting 30% savings from operational efficiencies, the fear is that the cuts may go too far and affect one part of the business that the banks absolutely have to get right.
Artjom Hatsaturjants, Research Analyst, 18 June 2018
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