Last time it was the new world discovered by reduced risk weighting of assets for banks introduced by Basle 2 in June 2004 that led to a wave of excitement leading up to the credit crunch. It introduced structural change that meant banks were for the first time allowed to leverage residential mortgages at 60:1. This time it is digital disruption. The valuations of the digital banks is extreme compares to that of the challenger banks. The result is M&A.
This morning CYBG PLC (Share Price 318p Mkt Cap £2.8bn) considered bidding for Virgin Money ( Share Price 312p Mkt Cap £1.4bn). They are contemplating an all paper offer which values Virgin Money at 360p per share. It seems likely these terms will need to be tweeked to get shareholder agreement. However, all the other challengers and digital banks will be taking a close look. This could set off a wave of consolidation.
There is structural change in the buy 2 let space too. So Paragon (Share Price 527p Mkt Cap £1.4bn) this morning announced it is also contemplating the acquisition of Titlestone, owned by Oaktree private equity which has a £600m balance sheet.
Other areas where structural change could lead to consolidation is:
- Motor Finance – Contenders are Close Brother (PER 11, yield 4%) and S&U (Per 10 yield 3.8%)
- Fund managers – A few example have happened so far. First one to blink will get a bid
- Wealth Managers – Brewin and Rathbone are both on the hunt for new CFO’s. They may be better off hiring just one for the combined group. Brewin’s £200m of cash could make this financially accretive.Will the platforms buy up the robo’s that are struggling with distribution ? AJ Bell coming to market will provide a warchest
- Exchanges – As CME takes Nex group there is already one attempt to buy Nex markets out of Nex group going on.
We get M&A at the top of the cycle and the bottom of the cycle. It seems highly unlikely this can be called the bottom of the cycle. The oil that lubricates the wheels of M&A is availability of finance. While markets remain high and credit markets remain loose there is going to be a party to rival Glastonbury. It could last some time. Note to self: to keep an eye on the long bond yield so I get to leave the party before the ceiling falls in. I am off we go to the party for now.
Jeremy Grime | firstname.lastname@example.org