By Lars Mucklejohn
Nationwide, the world’s largest building society is gearing up for the UK’s biggest banking tie-up since the financial crisis as it looks to finalise a £2.9bn takeover deal for high street rival Virgin Money in the coming weeks.
The deal, which both firms agreed to on a preliminary basis earlier this month, would create a combined group with some 700 branches and assets of roughly £366.3bn.
Nationwide’s offer would deliver Virgin Money shareholders 220p per share, a 38 per cent premium on its then stock price. It would net Richard Branson a payout upwards of £400m, considering his 14.5 per cent stake in Virgin Money and licencing deals over the brand.
The society’s board has until 4 April to make a formal offer for Virgin Money, which would then be put to the latter firm’s shareholders. Since the bid was unveiled, Virgin Money’s shares have hovered close to Nationwide’s offer price, suggesting that investors think a rival bid is unlikely.
Mutuals vs big banks
Nationwide has previously acquired several smaller building societies, including Portman, Dunfermline, Derbyshire and Cheshire. However, Virgin Money is a listed bank about a third of Nationwide’s size.
The society, which is celebrating its 140th anniversary this year, is one of the UK’s last big mutually owned financial institutions. This means it is not listed on the stock market, and its board more directly answers to customers rather than investors.
The Labour Party is looking to double the size of the UK’s mutual and co-operative financial services sector, arguing the structure of member-owned mutual organisations makes them more community-oriented.
Mutuals reinvest their profits in the business or pass them on to customers with better pricing and distributions to core members. Nationwide, which posted bumper profits from interest rate hikes, launched a £340m cash giveaway with £100 payments to 3.4m customers last year and plans to do it again in 2024.
In contrast, big banks are owned by shareholders, with excess capital often returned through dividends or buybacks.
Nationwide has tried to set itself apart from the big banks on critical customer issues, so much so that one of its adverts starring Dominic West as an obnoxious bank boss dismissing complaints and prioritising shareholders triggered a complaint to the advertising watchdog, reportedly from rival Santander.
For more than a decade, it has led peers in customer satisfaction by a wide margin. While British lenders have been swamped with complaints over hundreds of branch closures, Nationwide has pledged to keep all of its current locations open until at least 2026, barring circumstances “outside of our control.”
Now, Nationwide plans to take its challenge to the next level. The deal would mark Nationwide’s entry into the riskier business banking market as it looks to scale and diversify away from interest-rate-sensitive savings and mortgages while still becoming the second-largest provider of these products behind Lloyds Banking Group.
It would acquire more branches and staff at a time when many other lenders, including Virgin Money, are cutting costs and shifting further towards online services. The society has said it does not expect to make any “material changes” to the size of Virgin Money’s 7,300 workforce in the near term.
On the other hand, Nationwide would save on IT and other integration costs in the medium term as the two brands would operate as separate entities for the first six years.
Supporters have cheered on the deal as big win for the mutual model, which has had a rocky history.
Between 1989 and 2000, ten building societies demutualised by either converting into or merging with a bank. Among these firms was Northern Rock, now owned by Virgin Money and set to return to the mutual sector after leaving it for a stock market listing in 1997.
Others included Halifax, Woolwich, and Abbey National, which were absorbed by Lloyds, Barclays, and Santander.
Nationwide itself put the issue to a vote in 1997, with most of its members opposing demutualisation.
Recent signs within the sector point to a new spirit of competition. Nationwide’s offer was preceded by Coventry Building Society, the UK’s second-largest, entering exclusive talks to merge with The Co-operative Bank that analysts say could lead to an estimated £700m deal.
Members without a say
Some have questioned Nationwide’s decision not to put its Virgin Money offer to a member vote despite the fact that their capital is set to be used for the transaction.
There is a recent precedent for a big deal falling through on these groups. Just two years ago, members of life assurer LV= rejected a £530m takeover attempt by private equity firm Bain Capital.
“The whole beauty of a mutual is that it is run in the interests of its members who have voting rights too, and giving them the chance to exercise their right in a major transaction seems sensible,” said Conservative peer and former pensions minister Ros Altmann.
City A.M. understands that the society is seeing little internal demand for a member vote on the takeover.
Virgin Money’s six million customers would not be eligible for and would dilute the benefits enjoyed by Nationwide’s members, while the two firms are run as separate entities.
The society has taken legal advice that a vote is not required under the 1986 Building Societies Act as the combined group would still meet its definition of an organisation principally “making loans which are secured on residential property and are funded substantially by its members”.
Liberal Democrat peer Sharon Bowles, who chaired the European Parliament’s committee on economic and monetary affairs between 2009 and 2014, suggested that while Nationwide’s offer looked good on paper, it would mean a big change in character for the society.
City A.M. understands that the society believes the member vote process could take it past the 4 April deadline while being highly likely to result in approval anyway.
Robin Fieth, chief executive of the Building Societies Association, said: “There are many parts of financial services which would benefit from the mutual model, not least business banking.”
