Virgin Money/NWide: Cash Offer Could Widen Buyer's Spreads

Virgin Money cash offer (VMUK LN) from Nationwide should tighten its credit stack marginally today and widen that of NWIDE, we feel - some thoughts:

• VM only has three covered bonds and two senior bail-in notes in EUR which may well trade tighter today as this is a cash deal (the equity will certainly bounce, we feel). NWIDE (A1/A+/A+ at sr unsecured) has a much fuller EUR credit stack which have nearly all tightened YTD. VMUK is to be kept as a separate legal entity with its own board and banking licence – likely has implications for VMUK bonds.
• The industrial logic of the deal is sound – in-market mergers usually create value in banking. The offer is recommended by both boards so is very unlikely to fail, unless a significantly higher offer comes in from a third party. Which would likely tighten VMUK’s stack further.
• The price is at a 40% premium to the undisturbed VMUK price (so a large premium), NWIDE is roughly three times larger than VMUK in customer lending terms, but NWIDE isn’t looking to cut branches or employee numbers. So, this looks a tough deal to justify to NWIDE’s owners. Being a mutual, this is, effectively, the customer base itself.