The Co-operative Bank has taken a bold approach to a merger with TSB in a move that could spark a new wave of consolidation among mid-sized UK lenders.
Sky News learned that the Co-operative Bank contacted TSB’s Spanish owner Banco Sabadell earlier this month to gauge its appetite for a deal.
It is understood that he would be prepared to pay over Â£ 1 billion for the TSB.
Sources in the city said over the weekend that Sabadell had indicated that she was unwilling to enter formal talks at this stage on a merger of what by some measures are the seventh and eight largest banks. from the United Kingdom.
If it did materialize, a merger between two of the industry’s best-known brands would create a high-profile lender with more than 8 million customers including mortgages, checking accounts, credit cards and savings products.
This would make the combined business larger in number of customers than Virgin Money, which has around 6.5 million customers, although it is smaller than Virgin Money, measured by the size of its loan portfolio.
It would also remain much smaller than Lloyds Banking Group, NatWest Group, Barclays, HSBC Holdings and Santander UK in terms of market share and presence in department stores.
Nonetheless, the Co-operative Bank’s approach to TSB was described over the weekend by an industry executive unrelated to the potential deal as a logical move.
The profitability of UK retail banks has been hampered since the aftermath of the 2008 financial crisis, with interest rates at historically low levels for more than a decade.
Analysts have for years predicted a wave of corporate activity that would see midsize banks increase, although OneSavings Bank’s combination with Charter Court Financial Services and Virgin Money’s merger with CYBG have proven to be exceptions.
This week, the takeover of Sainsbury’s Bank by Centerbridge Partners, the US investor, collapsed after the supermarket group concluded it would not provide shareholder value.
If the Co-operative Bank were to succeed with a formal bid for TSB, it would be a deal laden with corporate irony.
In 2013, the Co-operative Bank’s offer to acquire the branch network that became TSB was left in ruins when the scale of its own financial crisis emerged.
The Co-operative Bank, which at the time was majority-owned by the Co-op Group, one of the UK’s largest mutuals, was forced to turn to a group of US hedge funds as part of a ‘a Â£ 1.5 billion bailout deal.
Its former president, Paul Flowers, was humbled by the tabloids’ revelations about his private life that led him to be dubbed “the Crystal Methodist,” and resulted in an overhaul of his leadership and ownership structure.
The next eight years, however, brought further turmoil for both the Co-operative Bank and TSB, the first dependent on another investor bailout in 2017.
TSB, meanwhile, was thrown into a storm the following year when a computer systems calamity deprived millions of customers of their accounts for days.
The incident came three years after Sabadell bought TSB from public investors and Lloyds Banking Group, its former parent company.
The future of TSB has been the subject of intense speculation since last year when its Spanish owner signaled that it would be open for sale.
The odds of a short-term deal diminished in the spring, however, when Sabadell indicated he would delay the auction process.
News of the Co-operative Bank’s unsolicited approach to Sabadell is likely to pique the interest of other suitors for TSB, which operates nearly 300 branches.
It comes just weeks after the TSB confirmed the appointment of city veteran Nick Prettejohn as the new president.
The Co-operative Bank’s ability to deliver a deal of this magnitude underlines its recent recovery, having reported underlying profit of nearly Â£ 13million for the first half of 2021.
It has benefited from interest in a takeover itself, although talks about a sale to Cerberus Capital Management, an often controversial investor, collapsed last December.
A merger with TSB would almost certainly facilitate a medium-term exit for owners of Sabadell and the Co-operative Bank, potentially through a public sale of shares.
In April, two major investors – Bain Capital Credit and JC Flowers – took a 10% stake in Co-operative Bank, which some analysts interpreted as a sign that it would become more proactive in its approach to consolidating industry.
The other shareholders of the lender are GoldenTree Asset Management and Silver Point Capital, two hedge funds based in the United States.
Credit Suisse advises the Co-operative Bank, while Goldman Sachs has been retained by Sabadell to advise on the future of TSB.
A spokesperson for Sabadell said: “This is not a transaction that we wish to explore at this time, as we have previously expressed publicly.”
The Co-operative Bank and TSB declined to comment.