Virgin
Money,
the
sixth-largest
bank
in
the
UK,
appears
likely
to
be
acquired
by
Nationwide
Building
Society,
with
the
parties
reaching
a
preliminary
agreement.
The
220p
consideration
appears
fair
in
our
view.
It
is
a
5%
premium
to
our
stand-alone
fair
value
estimate
for
no-moat
Virgin
Money,
and
a
considerable
38%
premium
to
the
share
price
prior
to
the
announcement,
which
has
languished
for
years.
The
consideration
comprises
a
218p
cash
payment
plus
a
2p
dividend.
The
Virgin
Money
board
has
concluded
that
if
a
firm
offer
is
made,
it
recommends
that
shareholders
accept.
We
increase
our
fair
value
estimate
in
line
with
the
indicative
price
of
220p
or
$A4.25
at
current
exchange
rates.
Nationwide
is
the
world’s
largest
building
society
and,
with
the
acquisition
of
Virgin
Money,
would
become
the
second-largest
provider
of
mortgages
and
savings
accounts
in
the
United
Kingdom.
In
addition
to
scale
benefits,
Nationwide
believes
the
credit
card
and
business
banking
offerings
it
picks
up
will
help
broaden
its
product
offering
and
diversify
funding
quicker
and
more
efficiently
than
it
could
organically.
Nationwide/Virgin
Deal
Should
Go
Ahead
Shares
shot
up
and
now
trade
at
a
modest
2.4%
discount
to
the
agreed
price,
implying
the
market
expects
the
acquisition
is
almost
sure
to
proceed.
While
we
agree
it
is
highly
likely
and
don’t
see
a
higher
competing
bid
incoming,
the
modest
upside
from
here
against
the
downside
risk
if
the
acquisition
doesn’t
proceed
should
be
considered.
Selling
on
the
market
and
investing
in
another
UK
bank
is
an
option
for
investors
seeking
exposure
to
the
sector.
Especially
when
other
UK
banks
covered
by
my
colleague
Niklas
Kammer,
like
narrow-moat
Lloyds
Banking
Group,
trade
at
a
37%
discount
to
fair
value
and
Barclays
at
a
19%
discount.
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