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This bank plans to grow 50% via acquisition when the big four are shedding assets

The share price of UK challenger bank CYBG PLC/IDR UNRESTR (ASX: CYB) fell from the opening bell after it announced that it had lobbed a circa $3 billion bid for Virgin Money Holdings (UK) PLC.

I am not surprised to see CYBG, more commonly called Clydesdale Bank, slip on the news as the bidder’s shares typically fall in value on such news, particularly if it’s an all scrip offer like this one is.

Clydesdale Bank’s ASX-listed shares lost 2% to $5.53 in afternoon trade as investors digested the news that it had made a preliminary offer to acquire Virgin Money by swapping 1.1297 of Clydesdale Bank’s shares for every Virgin Money share.

This is a conditional bid so it’s too early to say if the deal will be consummated but the merger could effectively expand Clydesdale Bank’s market cap by around 50%.

The deal makes sense, on paper at least, as both financial institutions are seen as “challenger banks” to the more established banking institutions in the UK.

Challenger banks need scale to compete effectively and Virgin Money’s strong brand equity should offer good synergies to Clydesdale Bank, which was already the biggest challenger bank in that market after it’s split from National Australia Bank Ltd. (ASX: NAB).

“CYBG believes the combination would create the UK’s leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent banks,” said Clydesdale Bank.

“The combination would provide a powerful full-service banking offer, including leading digital and mobile banking services, for 6 million personal and business customers.”

Given where the share prices of Virgin Money and Clydesdale finished trading on the London Stock Exchange, the premium offered to Virgin shareholders is around 15%. That seems to be a reasonable price to pay but without any financial details, it is hard to work out the earnings implications for the bidder if the merger was to go ahead.

But no matter how you look at it, this is a dramatic acquisition given the relative size of Virgin Money. I think it reflects a growing propensity for listed companies to undertake bold transactions, except for our big banks who are battening down in the wake of the Banking Royal Commission.

If anything, our big banks are shedding assets to downsize with Commonwealth Bank of Australia (ASX: CBA) exploring the option of spinning off its investment manager Colonial First State, while Australia and New Zealand Banking Group (ASX: ANZ) is in the process of selling its wealth business to IOOF Holdings Limited (ASX: IFL).

I am staying underweight to the big banks despite the reasonably pleasing results from Westpac Banking Corp (ASX: WBC) and ANZ Bank, and the only bank stock I am overweight on is Clydesdale Bank.

I believe the acquisition of Virgin Money will increase Clydesdale Bank appeal.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, CYBG Plc, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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