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Virgin Money Takeover Would Create UK’s Largest Challenger Bank

U.K. challenger bank Virgin Money could become one of the country’s largest financial institutions should it proceed with a takeover bid, according to Reuters reports on Tuesday (May 8).

Virgin Money is reportedly considering a merger with CYBG, which owns Clydesdale and Yorkshire Bank, in a $2.2 billion deal. Reports said Virgin Money would own more than 36 percent of the combined entity, though no deal is guaranteed: Virgin Money said it is reviewing the preliminary offer put forth by CYBG.

“The current indicative terms in no way reflect the relative strengths of the two companies, so CYBG would have to improve them significantly for us to even consider an offer,” an unnamed top-10 Virgin Money shareholder told Reuters. “There is some strategic logic and plenty of potential synergies in a combination of the two, but also plenty of execution risk, particularly from an IT perspective in light of recent events at TSB.”

TSB is current in the midst of an IT disaster that shut out some of its customers from accounts after attempts to migrate its IT system from that of its former owner Lloyds to its own system. The saga highlights the logistical and technological challenges of banking industry mergers and acquisitions.

According to Reuters, shares rose not only in Virgin Money, but also in other challenger banks like Metro Bank and OneSavings Bank as analysts and investors anticipate industry consolidation. The publication noted that, while mid-size challengers like Virgin Money have successfully positioned themselves to compete with large banks and to fill small business (SMB) financing gaps in the market, smaller, digital-only competitors are also putting pressure on the industry.

“We think Virgin shareholders will be lukewarm on the proposal,” said Goodbody analyst John Cronin in an interview with the publication.

Virgin Money beat analyst expectations with its first-quarter performance, posting a 7.4 percent year-over-year increase in overall deposits, totaling $42.34 billion. The bank also recently introduced its small business services with plans to introduce additional offerings for SMB clients later this year.

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