Nationwide Building Society and Virgin Money UK PLC (LON:VMUK) have announced that they have reached preliminary agreement on the key terms of a potential cash acquisition of Virgin Money by Nationwide, under which Virgin Money ordinary shareholders and CHESS Depositary Interests holders would be entitled to receive a total value of 220 pence in cash for each Virgin Money ordinary share (including those represented by CDIs) comprising:
· 218 pence per Virgin Money Share in cash consideration; and
· a proposed dividend of 2 pence per Virgin Money Share, to be paid (subject to the approval of the Virgin Money Board) as part of Virgin Money’s ordinary course FY2024 dividend calendar or, if earlier, shortly prior to completion of the Potential Acquisition.
In addition to the total value of 220 pence per Virgin Money Share, eligible Virgin Money Shareholders would continue to be entitled to receive and retain the final dividend of 2 pence per Virgin Money Share in respect of FY2023, which will be paid on 20 March 2024.
The total value of 220 pence per Virgin Money Share (excluding the Final Dividend) represents a premium of 38% to Virgin Money’s undisturbed share price as of 6 March 2024, and a 40% premium to the volume-weighted average price for the 3 month period ending 6 March 2024. The total value of 220 pence per Virgin Money Share values the entire issued share capital of Virgin Money at approximately £2.9 billion.
The announcement of any firm offer under Rule 2.7 of the Takeover Code in respect of the Potential Acquisition by Nationwide is subject to the satisfaction or waiver of a number of customary pre-conditions, including, amongst other things, the satisfactory completion of customary due diligence in respect of the Virgin Money group.
Strategic rationale
The Boards of Nationwide and Virgin Money believe that, if it proceeds, the Potential Acquisition would combine two complementary businesses. The Potential Acquisition would create a combined group with total assets of approximately £366.3 billion and total lending and advances of approximately £283.5 billion, representing the second largest provider of mortgages and savings in the UK.
Nationwide has grown over time through a series of historical acquisitions to become the UK’s largest building society. Nationwide remains wholly committed to being a building society and a modern mutual that meets its customers’ and members’ banking needs to a high standard.
The Nationwide Board believes that the Potential Acquisition would enable Nationwide to accelerate its strategy and broaden and deepen its products and services faster than could be achieved organically, whilst providing a return that would further support Nationwide’s financial strength and deliver greater value to its customers and members. In particular:
· Customers, Lending and Deposits: Virgin Money is the UK’s sixth largest retail bank by total assets with a customer base of approximately 6.6 million and total lending of £72.8 billion, comprising a high-quality mortgage portfolio of approximately £57.1 billion and deposit portfolio of approximately £67.3 billion. The Potential Acquisition would enable Nationwide to increase its scale in its core lending and deposit markets and strengthen Nationwide’s position as one of the UK’s leading providers of mortgages, savings and current accounts.
· Credit Cards: Virgin Money has a strong unsecured lending business, with £6.7 billion of balances, including an estimated 8.6% market share of UK credit cards, which the Nationwide Board believes would complement Nationwide’s existing product offering and unsecured lending.
· Business Banking: The Nationwide Board believes that Virgin Money’s £9.0 billion of existing business lending balances and ‘Business Current Account’ would enable Nationwide to build on its existing business savings proposition, with a broader business banking offering to support Nationwide’s growth and diversify its sources of funding.
The Nationwide Board believes that the Potential Acquisition would create a combined group with enhanced financial strength, including through access to greater diversity of funding, notably from business deposits, and the opportunity to generate improved returns. Nationwide expects to be able to capitalise on this financial strength to support the continued provision of its ‘Fairer Share Payment’ to eligible Nationwide members and member financial benefits via mortgage and savings rates that are, on average, better than the market average, along with other incentives.
In order to realise the exciting opportunity presented by the Potential Acquisition, Nationwide has developed key objectives for the combined group across the areas of integration, colleagues and customers:
· Integration: Nationwide would seek to integrate Virgin Money gradually over multiple years into the Nationwide group, prioritising good customer outcomes following the completion of comprehensive planning and engagement with relevant stakeholders. In the medium term, Virgin Money would continue to operate as a separate legal entity within the Nationwide group, with a separate board of directors and a separate banking licence. Nationwide intends that the combined group would retain the “Virgin Money” brand in the medium term, but has agreed with Virgin Enterprises Limited (“Virgin Enterprises”) that it would cease doing so over a six-year period from completion of the Potential Acquisition, by which point Nationwide would intend to have re-branded the Virgin Money business.
Nationwide has the largest single-brand branch network in the UK and is committed to maintaining its breadth of coverage. Nationwide would keep its ‘Branch Promise’ and, from completion, it intends to retain a branch everywhere where the combined group is present, until at least the start of 2026. This would be subject to any relevant plans and proposals for branch closures that have already been approved by Virgin Money, and which are ongoing as at completion. In addition, Nationwide values Virgin Money’s ongoing presence in Glasgow and Newcastle.
· Colleagues: The Nationwide Board believes that Virgin Money’s purpose and principles are well aligned with those of Nationwide. Nationwide values the skills and experience of Virgin Money’s approximately 7,300 full time equivalent workforce and believes the Potential Acquisition would be an opportunity to harness the talent of this group. Nationwide would be committed to helping Virgin Money’s people be at their best and thrive, leveraging the existing colleague proposition – one that seeks to promote a high-performing, purpose-driven culture, which helps colleagues feel supported and develop rewarding careers.
Nationwide does not intend to make any material changes to the size of the Virgin Money employee base in the near term, and would safeguard the existing contractual and statutory rights of Virgin Money employees, including pension arrangements and redundancy policies.
· Customers: Nationwide is committed to maintaining its breadth of coverage and over time, the combined group’s customers would benefit from the enlarged range of products and propositions on offer. Virgin Money customers would not automatically become members of Nationwide.
Nationwide offers a comprehensive range of wider retail financial services and products, including credit cards, personal loans and insurance. These offerings diversify its income, and help it give value back to its customers, through better product pricing than the market average and better service than its peers.
Virgin Money Board’s views of the Potential Acquisition
The Virgin Money Board has carefully evaluated the Potential Acquisition together with its financial advisers and has concluded that, should a firm offer be made on the same financial terms as the Potential Acquisition, it would be minded to recommend it to Virgin Money Shareholders. Sara Weller, the Virgin Money director who is appointed to the Virgin Money Board as a representative of Virgin Enterprises, has not been involved in Virgin Money Board discussions relating to aspects of the Potential Acquisition specifically concerning the brand licence agreement with Virgin Enterprises, the Virgin brand and the Virgin Red loyalty programme.
The Virgin Money Board has assessed the Potential Acquisition against its standalone plan to deliver its digital strategy and develop an efficient platform which will support robust sustainable returns. Continued growth in target segments of business, unsecured lending and relationship deposits will support stronger income, which combined with ongoing cost savings, is expected to deliver further reductions in the cost:income ratio and improved returns over time.
Virgin Money has made a positive start to the year and carries good momentum into FY2024 as it continues to execute its strategy. As set out in its trading update on 6 February 2024, in Q1 FY2024 Virgin Money delivered continued growth in relationship deposits and target lending segments, whilst maintaining a stable margin and with ongoing cost efficiencies absorbing inflation. Virgin Money continued to maintain a robust funding and capital position in the quarter, with credit quality trends consistent with FY2023 and increased coverage levels.
Against this backdrop, if the Potential Acquisition is implemented, the Virgin Money Board notes the potential for Virgin Money to benefit from Nationwide’s scale and pace of investment, and for Nationwide to leverage Virgin Money’s capabilities and strengths. For Virgin Money Shareholders, Virgin Money’s Board notes the Potential Acquisition would deliver an attractive premium and strong value crystallisation in cash. The Virgin Money Board also notes that the terms of the Potential Acquisition have been arrived at following a series of proposals from Nationwide.
Arrangements with Virgin Enterprises and Virgin Group
Virgin Money licenses certain rights to use the “Virgin Money” brand from Virgin Enterprises pursuant to a trade mark licence agreement. Nationwide recognises the significant role that the “Virgin Money” brand has played in the development of the Virgin Money group over time. However, as part of its longer-term integration strategy, Nationwide intends for the Virgin Money business to re-brand over time.
Prior to this announcement, Nationwide has entered into a legally binding agreement with Virgin Enterprises pursuant to which the parties have agreed that the TMLA would be terminated on the fourth anniversary of completion of the Potential Acquisition, following which the Virgin Money group would have a two-year period during which it would be required to complete its re-branding. In addition, Nationwide and Virgin Enterprises are currently exploring options for a potential partnership relating to the expansion of the Virgin Red loyalty programme to customers of the combined group.
Virgin Group Holdings Limited has also confirmed to Nationwide that, should a firm offer be made on the same financial terms as the Potential Acquisition, it would be minded to support such a firm offer by voting in favour of the related scheme of arrangement or accepting the offer (as applicable). Virgin Group holds 188,083,550 Virgin Money Shares (representing approximately 14.5% of the total number of Virgin Money Shares in issue).
Virgin Group believes that Virgin Money will continue to ‘change business for good’ as part of the combined group and welcomes the opportunity to further explore options for a potential partnership to extend the Virgin Red loyalty programme to customers across the combined group.
This announcement has been made with the consent of each of Virgin Enterprises and Virgin Group.
Chairman of Nationwide Building Society, Kevin Parry commented:
“A combination with Virgin Money would accelerate Nationwide’s strategy and create a stronger, and more diverse, modern mutual.
The combination would increase Nationwide’s scale and financial strength, put us in a stronger position to continue to provide Fairer Share Payments to eligible Nationwide members, and offer rates for mortgages and savings that are, on average, better than the market average.”
Chief Executive Officer of Nationwide Building Society, Debbie Crosbie commented:
“Importantly, Nationwide will remain a building society, and a combined group would bring the benefits of fairer banking and mutual ownership to more people in the UK, including our continuing commitment to retain existing branches, as part of our ‘Branch Promise’ and leading levels of customer service.
We believe the combination would create a stronger and more diverse business that will be better placed to deliver value to our members and customers, both now and in the future.”
Chairman of Virgin Money UK PLC, David Bennett commented:
“The Board of Virgin Money is pleased that Nationwide recognises the considerable strengths and opportunities that exist across our business, with the potential acquisition delivering attractive value for our shareholders. We are confident that a combination would support an exciting new chapter for Virgin Money to benefit from Nationwide’s scale and ambition.”
Chief Executive Officer of Virgin Money UK PLC, David Duffy commented:
“This potential transaction with Nationwide represents an exciting opportunity to build on the significant progress we have made in becoming the only new Tier 1 bank in recent history. The combined scale and strength would expand our customer offering and complete our journey in the banking sector as a national competitor.”
Other aspects
The cash consideration necessary to satisfy the Potential Acquisition in full would be funded from Nationwide’s existing cash resources. It is not anticipated that the Potential Acquisition, should it proceed, would require any immediate changes to the capital structure of the Virgin Money group or the combined group as a whole.
If, on or after the date of this announcement and before completion of the Potential Acquisition, other than the FY2024 Dividend, the Final Dividend and any repurchases of Virgin Money Shares (including CDIs) by Virgin Money pursuant to the Buyback Programme (as defined below), any dividend, distribution or other return of capital or value is announced, declared, made or paid by Virgin Money or becomes payable by Virgin Money in respect of the Virgin Money Shares (including CDIs), Nationwide reserves the right to reduce the Consideration that would be payable for the Virgin Money Shares pursuant to the Potential Acquisition by an amount up to the amount of such dividend and/or distribution and/or other return of capital or value. In such circumstances, Virgin Money Shareholders would be entitled to receive and retain any such dividend and/or other distribution and/or return of capital or value to which they are entitled.
The Potential Acquisition would be subject to customary conditions and terms to be set out in the firm offer announcement under Rule 2.7 of the Takeover Code. The Potential Acquisition would not be subject to any condition relating to the passing of a resolution by Nationwide’s members.
In light of the Potential Acquisition, the Board of Virgin Money has determined to suspend the £150 million share buyback programme announced on 23 November 2023 (the “Buyback Programme”) on the London Stock Exchange and the Australian Securities Exchange until further notice.
Important Takeover Code notes
There can be no certainty that any firm offer will be made, even if the pre-conditions referred to above are satisfied or waived.
In accordance with Rule 2.6(a) of the Takeover Code, Nationwide must, by no later than 5.00 p.m. on 4 April 2024, either announce a firm intention to make an offer for Virgin Money in accordance with Rule 2.7 of the Takeover Code or announce that it does not intend to make an offer for Virgin Money, in which case the announcement will be treated as a statement to which Rule 2.8 of the Takeover Code applies. This deadline will be extended only with the consent of Virgin Money and the Panel in accordance with Rule 2.6(c) of the Takeover Code.
Prior to this announcement it has not been practicable for Nationwide to make enquiries of all persons acting in concert with it to determine whether any dealings in Virgin Money securities by such persons give rise to a requirement under Rule 6 or Rule 11 of the Takeover Code for Nationwide, if it were to make an offer, to offer any minimum level, or particular form, of consideration. In accordance with note 4 on Rule 2.4 of the Takeover Code, any such details shall be announced as soon as practicable and in any event by no later than 21 March 2024.
In accordance with Rule 2.5 of the Takeover Code, Nationwide reserves the right to amend the terms of any offer (including to make an offer on less favourable terms than those set out in this announcement and introduce other forms of consideration) if: (i) the Virgin Money Board agrees; (ii) if Virgin Money announces, declares or pays a dividend or any other distribution or return of value to Virgin Money Shareholders (other than the FY2024 Dividend, the Final Dividend and any repurchases of Virgin Money Shares (including CDIs) by Virgin Money pursuant to the Buyback Programme) after the date of this announcement, in which case Nationwide reserves the right to make an equivalent reduction to any offer; (iii) a third party announces a possible offer or a firm intention to make an offer for Virgin Money; or (iv) Virgin Money announces a Rule 9 waiver pursuant to the Takeover Code.
A further statement will be made as appropriate.
