CYBG must be a richer suitor if it wants to bag Virgin Money, says Jim Armitage

JIM ARMITAGE
David and Victoria Beckham (pictured) at the London marathon sponsored by Virgin Money: Getty Images

Virgin Brides was a fairly short-lived venture for Sir Richard Branson. Launched just off Trafalgar Square in 1996, it sank a little more than a decade later, going the same way as Virgin Cola, perfume and vodka.

Virgin Money has been a more successful proposition, and now looks set to be the blushing bride for an Aussie suitor.

The logic behind the marriage is sound. CYBG will benefit by taking on Virgin’s big mortgage book and accessing one of the most recognised brands in the country. Virgin will be boosted by CYBG’s digital prowess and being part of a far bigger bank.

The trouble is, the dowry being offered by CYBG to Virgin shareholders is stingy in the extreme.

Because of the fall in CYBG’s share price since launching its bid last month, even though Virgin shareholders get 38% of the combined company compared with 36.5% under the first offer, the value it puts on Virgin shares is actually lower than it was before. Where the first price was 359p, today it’s 354p.

That means CYBG is still paying only around 1.2 times book value for Virgin’s assets compared with the 1.8 times First Rand paid for Aldermore. Analysts such as Investec’s Ian Gordon reckon Virgin’s share price should be 440p, all things being equal. Indeed, he rates Virgin as his “top pick” in the sector.

So, although it’s good that the two sides are talking, and Virgin management are rightly sold on the strategic logic of the deal, if they accept an offer this low, it would look distinctly odd.

Rumours about weaknesses in Virgin’s credit card business, or its reliance on access to cheap credit from the government (under a scheme now coming to an end) would only be heightened. It’s not just Virgin Money shareholders who decide whether this pair walk down the aisle. Father of the bride Sir Richard has a substantial interest in what happens next.

At present, he gets £6 million a year to licence the Virgin name under a revenue share scheme. That will rise substantially as CYBG ditches some of its brands for his. Virgin might not work on everything — the banknotes Clydesdale prints north of the border won’t be featuring a Virgin “babe” anytime soon — but you can imagine it working well for CYBG’s current accounts, SME lending and digital bank.

The question is, how much is CYBG chief David Duffy prepared to keep paying him?

Once again, it’s good the two sides are talking, but Duffy can’t be seen to be agreeing to send a blank cheque to Necker Island every quarter.

In short, this wedding will probably happen, but there’s a way to go yet.

Unless there are problems at Virgin we don’t yet know about, a bid nearer 400p a share would be the best way to get this well-matched couple to the altar.