Nationwide building society has revealed a £2.3bn gain from its takeover of Virgin Money, prompting accusations that Virgin’s bosses decided to “take the money and run” after losing faith in the ex-chief executive David Duffy.
The building society’s bosses hailed the terms of the deal on Wednesday, as it published its final set of results as a standalone brand. Although the £2.8bn it paid for Virgin Money represented a premium on the target-bank’s share price – and its £2bn market valuation prior to the bid, according to Guardian calculations – it ended up being a “significant” discount compared with the actual value of Virgin Money’s assets.
Those assets are worth £5.1bn, Nationwide said, weeks after the deal completed in October. That represents a £2.3bn gain on the purchase price, which is even higher than the £1.5bn gain it had previously forecast.
“I don’t think there was any surprise,” Nationwide’s chief executive, Debbie Crosbie, said. “Certainly wasn’t any surprise for us. It was very thoughtful and very considered, and certainly on the Virgin Money board, they would have been very, very aware of this, as all of their competitors would have been about where they were trading.”
Investors and bosses have long bemoaned the floundering market valuations of UK banks on the London Stock Exchange. However, some analysts say the discounted sale price was also a sign that bosses had given up on Duffy and the 29-year-old bank.
“I think it highlights that the Virgin Money board didn’t have faith that the CEO’s plan to generate higher profitability from the business to support a higher standalone valuation was going to be successful, so they decided to take the money and run,” Gary Greenwood, a banking analyst at Shore Capital, said.
“They were struggling to deliver growth, particularly in mortgages, and were suffering from a funding disadvantage versus larger banking peers, which meant they had thinner margins.
“They also kept disappointing on below-the-line costs, noting management had only recently announced another [plan] to invest a further £130m in cybersecurity, which had not been expected by the market and so was not in forecasts. Consequently, the profits they generated were well below where they needed to be.”
Virgin Money bosses were due to share a £6m payout as a result of the deal, after accumulating stock through years of service at the bank, which was co-founded by the billionaire Sir Richard Branson in 1995.
That included the head of Virgin Money’s legal team, James Peirson, who was due a £691,812 windfall, and the chief financial officer, Clifford Abrahams, who was set for a £415,494 payout.
Duffy, who resigned in October as part of the takeover agreement, was due to take the lion’s share of the windfall, gaining about £3.5m from the buyout of his nearly 1.6m shares.
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Branson, who was Virgin Money’s largest shareholder and had backed the deal, will experience the biggest windfall of £724m. That includes £414m from his 14.5% stake. However, it also accounts for the £310m that Nationwide has agreed to pay for the use of the Virgin Money brand, a sum that includes £15m in annual royalties for the first four years, as well as a £250m exit fee, which will lead to the name disappearing from UK high streets within six years.
However, Crosbie said the £2.3bn gain would still give Nationwide “significant headroom” to cover the costs of integrating the two businesses, as well as service and value for customers. She hinted that could mean further payouts and competitive interest rates for account holders.
Crosbie said: “You should expect to see a really great package announced at the full year … and we’re working hard to make sure that that’s as attractive as it can possibly be.”
Her comments came as Nationwide published its half-year results, which showed that pre-tax profits fell 43% to £568m in the six months to 30 September. Bosses said this was due to falling interest rates, but also money spent on payouts and deals for customers.
