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Nationwide Building Society has reached a preliminary agreement to buy Virgin Money in a £2.9 billion deal that would strengthen its ability to challenge the UK’s big four banks.
Nationwide is offering a total of 220p for each Virgin Money share, including a final dividend of 2p, marking a 38% premium to the bank’s closing share price on Wednesday.
If the deal was finalized, Nationwide said the combined group would have total assets of around £366 billion and create the second largest provider of mortgages and savings in the UK.
Nationwide’s move marks the latest attempt at consolidation among mid-tier lenders that have struggled to break the grip of larger banks. Over the past year, rising credit card arrears have hurt Virgin Money’s performance amid a cost-of-living crisis.
Nationwide said Thursday that the transaction will allow it to “accelerate its strategy and broaden and deepen its products and services faster than could be achieved organically.” The acquisition, it added, would give it “access to a greater diversity of financing, particularly from corporate deposits.”
The purchase would also mark a rare acquisition of a listed company by a mutual company. Under the initial agreement, Nationwide would pay 218p a share in cash alongside the final dividend.
Virgin Money shares rose 36% to 217p in early trading.
Benjamin Toms, an analyst at RBC Capital Markets, said the deal would “potentially lead to greater competition in the UK mortgage and savings market” and increase building societies’ share of the mortgage market from 12.2% at 15.7%.
Virgin Money would initially continue to operate as a separate business within Nationwide, although it would eventually be integrated and the brand would fold over the next six years.
The building society added that it has no plans to “make any material changes to the size of Virgin Money’s employee base in the near term”. Virgin Money employs around 7,300 people.
Virgin Money’s board said it would be “intended” to recommend a firm offer if one was made. Virgin Group, which owns 14.5% of Virgin Money shares, also indicated it would support a deal that would allow it to “benefit from the scale and pace of investment nationwide”.
The Virgin Money company was formed after CYBG, owners of Clydesdale and Yorkshire Banks, took over the small Virgin Money business in 2018 and adopted its branding.
The companies cautioned that there is no certainty that a firm offer will be made.