INVESTORS have signalled their appetite for Clydesdale Bank owner CYBG’s takeover approach for Virgin Money, as shares in the Sir Richard Branson-founded bank leapt nearly ten per cent after details of the proposed merger surfaced.

CYBG declared its all-share approach for Virgin would create the UK’s leading challenger bank. It would have more than six million personal and business bank customers, customer loans worth £69.1 billion, deposits of £58.5bn and assets of £84.3bn.

Based on the bank’s closing price of 312.4p per share on Friday night, the approach values Virgin at £1.6bn. That implies a 15% premium on the bank’s Friday night price. CYBG, which spun out of National Australia Bank in 2016, has a market value of £2.8bn, based on its closing price of 318p on Friday. That would give a CYGB and Virgin a combined market worth of £4.4bn.

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Under the terms of the approach CYBG will offer 1.1297 of new shares for each Virgin Money share. Shareholders in Virgin, which is led by chief executive Jayne-Anne Gadhia, would own 36.5% of the combined group. CYBG, run by David Duffy, stated that its proposal would create a “genuine alternative to the large incumbent banks”, noting that a merger would combine the “complementary strengths of CYBG and Virgin Money”. It is understood to see value in combining the profile of the Virgin brand and its presence in digital banking and mortgages with CYBG’s strength in SME lending and its branch network.

The UK’s historically low interest rates, which are now widely expected to remain at 0.5% after the Monetary Policy Committee’s latest meeting this week, is not understood to be a factor in the deal.

Gary Greenwood, analyst at Shore Capital Markets, said: “We have thought for some time that further consolidation in the mainstream challenger banking space would take place, given that operators in the space have the capacity to support much larger balance sheets but perhaps lack the scale to really compete in a sustainable manner with the larger operators.

“Putting these two businesses together would create a new operator broadly twice the size of each of the standalone businesses, while also creating a challenger with a more broad-based product set.”

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However, fellow analyst Artjom Hatsaturjants at Accendo Markets said the prospect of a deal shows how difficult it has been for challengers to break the dominance of the major UK high street banks.

Pointing to the recent acquisition of Aldermore by South Africa’s FirstRand, he said: “The young upstarts sought to disrupt entrenched power of established UK banking institutions through use of information technology and more modern branding strategies, but rising costs, tough regulatory requirements and steadily rising competition have already resulted in some sector consolidation.”

A combination would have a branch network of around 250 outlets, adding CYGB’s 180 to Virgin’s 74. Mr Greenwood said there is a potential for cost savings by combining the two banks, without referring to branch closures.

But, pointing to the recent collapse of TSB’s digital banking operation, he warned that integrating two IT systems “in particular represents a significant challenge”, which could attract the attention of regulators. He also cautioned that a “complicated and lengthy integration” had the potential to distract management, leading to the merged entity losing ground to competitors.

Mr Greenwood added: “Regulators and politicians may also be concerned that this combination effectively removes a competitor from the market, albeit this needs to be balanced against a view of whether the new entity becomes a stronger competitor in the long-term than each of its individual parts.”

The approach comes after CYBG previously signalled its appetite to expand through acquisition. In 2016 it was linked with a bid for Royal Bank of Scotland’s 300-strong Williams & Glyn network, which the Edinburgh-based bank had been forced to offload by the European Commission as a condition of its £45bn bailout during the financial crisis. Royal Bank has since won approval for an alternative remedy which will see it spend £750 million on measures to boost competition in the small business banking market. However, it announced last week that some Williams & Glyn branches will close under plans to shut a further 162 outlets in England and Wales.

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“With this further strengthened customer franchise and national reach, CYBG believes the combination would deliver increased value for shareholders and wider benefits to other stakeholders,” CYBG said in a statement.

Virgin shares closed up 30.9p at 343.3p. CYBG shares edged up 3.6p at 321.6p.