By Emma Rumney
LONDON (Reuters) - Mid-sized bank CYBG (L:CYBGC) has agreed a 1.7 billion pound ($2.3 billion) all-share deal to acquire Virgin Money (L:VM), which it said will create Britain's sixth-largest bank by assets and a stronger challenger to the country's top four lenders.
The deal, the biggest bank merger in Britain since the financial crisis, is on the same terms as CYBG's sweetened bid earlier this month and will see Virgin Money shareholders, which include entrepreneur Richard Branson, own around 38 percent of the combined group.
The merged company will be around twice the size of its largest rival among Britain's smaller banks and be able to draw on the firepower of the Virgin brand, which the combined group will pay a royalty to keep.
CYBG CEO David Duffy, who will lead the new lender with Virgin Money CEO Jayne-Anne Ghadia acting as a senior advisor for an unspecified period of time, said the deal will create a bank with the capability to take on the largest players.
"The combination of CYBG and Virgin Money will create the first true national competitor to the status quo in UK banking, offering a genuine alternative for consumers and small businesses," he said in a statement.
Virgin Money shares rose more than 2 percent before paring their gains to trade little changed at 355p by 0810 GMT. CYBG shares, which dictate the value of the deal, were also flat at 306.4 pence after initially falling.
The take over still has to be approved by CYBG and Virgin Money shareholders, but John Cronin, analyst at stockbroker Goodbody, said both sets were likely to agree to the terms.
"Ultimately, we believe this is a great deal for both sets of shareholders and we expect it should receive their support."
Virgin Money investors will receive 1.2125 CYBG shares per Virgin Money share. Branson owns 35 percent of Virgin Money.
JOB CUTS, SAVINGS
The agreement comes after over a month of talks between the two lenders, and ahead of a deadline on Monday afternoon when CYBG, owner of Clydesdale and Yorkshire Bank, either had to make a firm offer or walk away under British takeover rules.
The banks said they expected to benefit from 120 million pounds in annual pre-tax cost savings, including by cutting approximately 1,500 jobs, leaving the group with a headcount of around 8,000.
While banding together will help the two banks fight competitive pressures from established players and smaller, tech-savvy newcomers, they face a tough fight to take on Britain's big four, which dominate the sector.
The new lender's size will pale in comparison to the likes of Royal Bank of Scotland (L:RBS). It would be the main bank for just 2 percent of high street customers compared with around 24 percent for market leader Lloyds Banking Group (L:LLOY), according to data from industry body RFi Group.
Virgin Group CEO Josh Bayliss said CYBG is the partner Virgin Money needs to continue to grow.
"We... look forward to helping the combined business rebrand to Virgin Money," he said, welcoming Duffy and CYBG employees to the group.
CYBG, whose will pay a fixed royalty to keep the Virgin Money brand, which starts at 12 million pounds in the first year and increases to 15 million pounds in the fourth year.
Like Duffy, CYBG's chairman, Jim Pettigrew and its finance director Ian Smith will all retain their roles in the combined group.