VOTE now! Proposed take over of Virgin Money - Nationwide members should be given a vote

masonic

mikael said:

Wheres_My_Cashback said:

masonic said:

Wheres_My_Cashback said:

masonic said:

There was a previous thread started less than a week ago where all of these arguments were thrashed out, but for some reason it got deleted. IIRC correctly at that time that petition had 3 signatures, so it is doing rather better than I'd imagined it would. I hope all those who have signed read the bit about paying a deposit.

FWIW, as a member I do not want there to be a vote. The last thing any mutual organisation needs is for its strategy to be dictated by members of the general public.

I couldn't give a XXXX about the takeover.

 As for the deleted thread aren't petitions banned from here. 

That would explain it. Shame the discussion couldn't have been left up. No doubt this won't be the last time a thread is started for this purpose.

Yes, but they always seem to be started by new posters who no doubt have underlying agendas and I would imagine that by permitting them MSE would open itself up to all sorts of problems. There are plenty of sites out there specifically for this type of thing.

[Quoted post removed by Forum Team]

26left said:

eskbanker said:

My understanding is that the petition isn't actually empowered to demand a member vote on the VM acquisition as such, but to try to persuade 500 members to part with £50 in order to organise a special general meeting, so I believe that Nationwide's response will be to arrange that meeting within 63 days of the formal request being received.

Presumably at that meeting they'd simply reiterate their legal advice about not holding a vote....

Re the £50 per member, I've had one person offer to put up the £25K themselves - it's refundable.

Let's hope that before anyone parts with any money, they establish they are dealing with the right person.

[Deleted User]

Hoenir said:

mikael said:

eskbanker said:

Middle_of_the_Road said:

eskbanker said:

Middle_of_the_Road said:

97 signatures so far. Seems like there are people not happy with this proposal.
Vote or not, they will do as they please, but good to see members challenging this already bloated society.

So about 0.0006% of the society's members, about a week after the petition was started - it's not exactly storming the barricades, is it?

No, it's not, but as in most scenarios like this the majority of those that dislike the proposal feel their voice will have no influence on the outcome, so remain silent. I do doubt though, that around 16 million members are all in favour, but we'll never know as Nationwide hasn't asked.  
It will be interesting to see what the Nationwide response will be when the 500 vote threshold is reached. 

112 votes 0.0007%

My understanding is that the petition isn't actually empowered to demand a member vote on the VM acquisition as such, but to try to persuade 500 members to part with £50 in order to organise a special general meeting, so I believe that Nationwide's response will be to arrange that meeting within 63 days of the formal request being received.

Presumably at that meeting they'd simply reiterate their legal advice about not holding a vote....

They might try to just reiterate their legal advice, but the Nationwide management would come under increasing pressure to hold a vote and explain in far more detail why members should support the move.

The finer detail would fly well above ordinary members heads.
Unlikely that the board will openly discuss matters of a commercially sensitive nature either. 

I personally wouldn't presume to speak for other people... 

WillPS

Glad the prevailing sentiment on here is that a vote should not be necessary, even if it were possible (and it isn't).

Agree entirely with those suggesting that the board should be allowed to get on with their job without risk of day-to-day member activism.

26left

They’re in touch with Mikael directly now so it’s not an issue

spider42

masonic said:
Unless I'm missing something, nobody is arguing that the Nationwide board of directors does not have the power to proceed with this acquisition.

You are right, that up until now nobody has made that point. But I'm just about to make it! Has anybody looked at what the Building Societies Act actually says regarding the requirement to hold a vote? I've just read it, and it isn't at all clear to me how the directors have reached the conclusion that a vote isn't legally required. I note that when the deal was first mentioned, The Times used the words "Its reading of the Building Societies Act is that no vote is required because Virgin Money has the features of a building society already, including more than 75% of assets in mortgages."

The words "Its reading ..." made it sound like it was somewhat open to interpretation. And I can see no relevance of the percentage of assets in mortgages - the test in the Act is the percentage of income derived from mortgages, which I'll come to below.

The relevant legislation is in Section 92A of the BSA86 "Acquisition or establishment of a business". https://www.legislation.gov.uk/ukpga/1986/53/section/92A

Subsection 1 says that an ordinary resolution is required if subsections 3 and 4 both apply.

Subsection 3 applies if "in the opinion of the board of directors of the society - (a) the greater part of the income of the business is or will be derived from activities having no connection with loans secured on residential property, or b) the greater part of the resources of the business are or will be devoted to such activities; or (c) the greater part of the business consists or will consist of such activities."

Subsection 3 appears to apply here. Per Virgin's 2023 accounts, interest income on residential mortgages was £1,537m (page 61). Total income was £3,833m (which included £474m from unsecured lending, £582m from business lending and £657m from liquid assets and £600m from swap income). Mortgage interest was therefore only about 40% of Virgin's total income, so quite a bit less than the 50% required to avoid a vote. So I'm not sure on what basis the directors could hold an alternative opinion, as the audited statutory accounts show mortgage interest is well under half of the total income of the business.

Therefore a vote is required if subsection 4 also applies. Subsection 4 applies if the acquisition is sufficiently large (more than 15% of the building society). So a 'small' acquisition doesn't require a vote, regardless of whether or not subsection 3 applies. But a 'big' acquisition does, if less than half the income of the the business acquired is from loans secured on residential property.

"This subsection applies to a business which is proposed to be acquired if X is not less than 15 per cent of Y where -

X = the amount or value of the consideration to be given for the shares, voting rights or assets proposed to be acquired; Y = the amount of the society’s own funds as at the relevant date."

X is £2.9bn, which is the amount Nationwide are paying for the Virgin shares. Nationwide's own funds, per its most recent Pillar 3 disclosures (at 31/12/23) were £17.568bn. So X appears to be 16.5% of Y, so a little over 15%. The test needs to be done at the "relevant date", which is defined as the end of the last financial year. Which will be 4 April 2024 by the time the transaction proceeds later this year. So possibly they are hoping that Y will have increased sufficiently between 31 December 2023 and 4 April 2024 to bring X/Y under the 15% threshold?

Therefore subsection 4 appears to apply too. As subsection 3 also appears to apply, that would therefore require a vote.

The only 'get out' I can see is that if subsection 1 legally requires a vote, it goes on to say that "failure to comply with this subsection shall not invalidate any transaction or other act."

So failure to hold a vote, even if one is legally required, it doesn't invalidate the transaction. I sincerely hope that is not the basis on which they have decided to proceed without holding a vote!

masonic

spider42 said:

The relevant legislation is in Section 92A of the BSA86 "Acquisition or establishment of a business". https://www.legislation.gov.uk/ukpga/1986/53/section/92A

Subsection 1 says that an ordinary resolution is required if subsections 3 and 4 both apply.

Subsection 3 applies if "in the opinion of the board of directors of the society - (a) the greater part of the income of the business is or will be derived from activities having no connection with loans secured on residential property, or b) the greater part of the resources of the business are or will be devoted to such activities; or (c) the greater part of the business consists or will consist of such activities."

Subsection 3 appears to apply here. Per Virgin's 2023 accounts, interest income on residential mortgages was £1,537m (page 61). Total income was £3,833m (which included £474m from unsecured lending, £582m from business lending and £657m from liquid assets and £600m from swap income). Mortgage interest was therefore only about 40% of Virgin's total income, so quite a bit less than the 50% required to avoid a vote. So I'm not sure on what basis the directors could hold an alternative opinion, as the audited statutory accounts show mortgage interest is well under half of the total income of the business.

Very interesting. I just feel the need to comment that I am astounded by the weasel words in this legislation. If "in the opinion of the board of directors of the society"... "are or will be"... "consists or will consist". It seems from the wording that the board can just be of the opinion that at some point after acquisition, the VM brand will raise its income from mortgage income to 50%. Surely this could be achieved by reducing the latter items you mention above? It seems to be the unsecured lending and business lending they are most interested in retaining. And they only need to be of the opinion that they will do this.

spider42

masonic said:

spider42 said:

The relevant legislation is in Section 92A of the BSA86 "Acquisition or establishment of a business". https://www.legislation.gov.uk/ukpga/1986/53/section/92A

Subsection 1 says that an ordinary resolution is required if subsections 3 and 4 both apply.

Subsection 3 applies if "in the opinion of the board of directors of the society - (a) the greater part of the income of the business is or will be derived from activities having no connection with loans secured on residential property, or b) the greater part of the resources of the business are or will be devoted to such activities; or (c) the greater part of the business consists or will consist of such activities."

Subsection 3 appears to apply here. Per Virgin's 2023 accounts, interest income on residential mortgages was £1,537m (page 61). Total income was £3,833m (which included £474m from unsecured lending, £582m from business lending and £657m from liquid assets and £600m from swap income). Mortgage interest was therefore only about 40% of Virgin's total income, so quite a bit less than the 50% required to avoid a vote. So I'm not sure on what basis the directors could hold an alternative opinion, as the audited statutory accounts show mortgage interest is well under half of the total income of the business.

 It seems from the wording that the board can just be of the opinion that at some point after acquisition, the VM brand will raise its income from mortgage income to 50%. Surely this could be achieved by reducing the latter items you mention above? And they only need to be of the opinion that they will do this.

No. I thought that might be the case initially, but it is an either or test. Subsection (3)(a) applies if either the greater part of the income is derived from activities with no connection with mortgages, or if the greater part of the income will be derived from activities with no connection with mortgages.

So the way it is worded increases the circumstances which require a vote. If the historic mortgage income was over 50%, but they expected future mortgage income to be under 50%, then subsection (3)(a) would still apply. And vice versa. If mortgage income is currently under 50%, then subsection 3 applies, irrespective of what happens in the future.

The other thought that occurred to me may be the " ... having no connection with loans secured on residential mortgages... " wording. If they sell someone a mortgage, and then mailshot them offering other services, and the same customer then takes out a credit card and a business loan, could they argue that the income was 'connected' with the mortgage, because without the mortgage, the customer may not have come to them for other loans? Possible, although I think that would probably be too tenuous.

masonic

Ah yes, it is essentially worded as required if 'any of the following' apply.

It does therefore look on the face of it to require the board to hold an opinion that is inconsistent with reality for subsection (3)(a) not to apply. Perhaps some business loans were secured on the residential property of a director, and perhaps some of the liquid assets were from savings in a mortgage offset, but it doesn't seem like this would come close to reaching the 50% threshold. I don't think credit card debt or loans held by someone who happens to also have a mortgage could be considered 'connected' with residential property lending.

So I am now intrigued what advice the board has received to convince them a vote is not required.

26left

spider42 said:

masonic said:
Unless I'm missing something, nobody is arguing that the Nationwide board of directors does not have the power to proceed with this acquisition.

You are right, that up until now nobody has made that point. But I'm just about to make it! Has anybody looked at what the Building Societies Act actually says regarding the requirement to hold a vote? I've just read it, and it isn't at all clear to me how the directors have reached the conclusion that a vote isn't legally required. I note that when the deal was first mentioned, The Times used the words "Its reading of the Building Societies Act is that no vote is required because Virgin Money has the features of a building society already, including more than 75% of assets in mortgages."

The words "Its reading ..." made it sound like it was somewhat open to interpretation. And I can see no relevance of the percentage of assets in mortgages - the test in the Act is the percentage of income derived from mortgages, which I'll come to below.

The relevant legislation is in Section 92A of the BSA86 "Acquisition or establishment of a business". https://www.legislation.gov.uk/ukpga/1986/53/section/92A

Subsection 1 says that an ordinary resolution is required if subsections 3 and 4 both apply.

Subsection 3 applies if "in the opinion of the board of directors of the society - (a) the greater part of the income of the business is or will be derived from activities having no connection with loans secured on residential property, or b) the greater part of the resources of the business are or will be devoted to such activities; or (c) the greater part of the business consists or will consist of such activities."

Subsection 3 appears to apply here. Per Virgin's 2023 accounts, interest income on residential mortgages was £1,537m (page 61). Total income was £3,833m (which included £474m from unsecured lending, £582m from business lending and £657m from liquid assets and £600m from swap income). Mortgage interest was therefore only about 40% of Virgin's total income, so quite a bit less than the 50% required to avoid a vote. So I'm not sure on what basis the directors could hold an alternative opinion, as the audited statutory accounts show mortgage interest is well under half of the total income of the business.

Therefore a vote is required if subsection 4 also applies. Subsection 4 applies if the acquisition is sufficiently large (more than 15% of the building society). So a 'small' acquisition doesn't require a vote, regardless of whether or not subsection 3 applies. But a 'big' acquisition does, if less than half the income of the the business acquired is from loans secured on residential property.

"This subsection applies to a business which is proposed to be acquired if X is not less than 15 per cent of Y where -

X = the amount or value of the consideration to be given for the shares, voting rights or assets proposed to be acquired; Y = the amount of the society’s own funds as at the relevant date."

X is £2.9bn, which is the amount Nationwide are paying for the Virgin shares. Nationwide's own funds, per its most recent Pillar 3 disclosures (at 31/12/23) were £17.568bn. So X appears to be 16.5% of Y, so a little over 15%. The test needs to be done at the "relevant date", which is defined as the end of the last financial year. Which will be 4 April 2024 by the time the transaction proceeds later this year. So possibly they are hoping that Y will have increased sufficiently between 31 December 2023 and 4 April 2024 to bring X/Y under the 15% threshold?

Therefore subsection 4 appears to apply too. As subsection 3 also appears to apply, that would therefore require a vote.

The only 'get out' I can see is that if subsection 1 legally requires a vote, it goes on to say that "failure to comply with this subsection shall not invalidate any transaction or other act."

So failure to hold a vote, even if one is legally required, it doesn't invalidate the transaction. I sincerely hope that is not the basis on which they have decided to proceed without holding a vote!

Thanks you for this - my take is similar, that NW management and advisors have been spinning this all along in the face of others rightly challenging the lack of a member vote (ordinary members, journalists, members of the Lords etc):

• First, their line was that a vote "is not required" (based on their advisors' interpretation of the law).
  
  
• Then, having fast forwarded to filing the deal paperwork, the papers reported that a vote wasn't possible because of the Takeover Code (but again, open to interpretation)
  
  
• 3rd it was leaked to the press that management had conducted a small 150 person survey (but hasn't published how it was conducted or the full results)

All in all - it still looks to me like management are trying to rush this through without consulting members, when they can, and should. And that if members were properly briefed on the arguments for and against, a vote would be fair and decisive.

26left

JamesRobinson48 said:

I oppose this transaction because I think the numerous risks outweigh any potential benefit for Nationwide members.  IMHO it's all about giving NW directors more money and kudos. I shall certainly vote against re-election of all board members at the AGM.  And I have a hunch that finally this deal won't happen.

That said, I feel the purchase price (£2.9 bn, plus future royalty payments to Branson) is sufficiently low to compensate for some of the risks. Granted, NW is paying a 38% premium to the VM share price preceding announcement. But also note that VM's 2023 financial statements show a book value (net of loan loss reserves) of £5.6 bn (page 285, see link).  So providing VM's existing assets will run off at anywhere approaching their carrying amount on VM's books, NW seems to be acquiring those assets at a substantial discount. I know there's a lot of moving parts here: for example VM's intangible assets and goodwill (£173mm) might not be worth much to NW. Also, it's true that no bidding contest has emerged yet. But I'm unsure if the debate on these boards to date has addressed the fairness of the purchase price.

https://www.virginmoneyukplc.com/downloads/pdf/virgin-money-uk-plc-2023-annual-report-and-accounts.pdf

You are right to point out that:
(a) VM is trading at less than it's book value (which shows how poorly the market views VM's current state and future value),
(b) that Nationwide is paying ~40% over the market value (looking at the takeover docs, prior offers were rejected), and
(c) no one else is bidding for VM.  

I find these points alone particularly telling.

But as I've stated before, what's alarming to me is the impact on capital reserves. In most takeover deals involving listed equity, there would be an estimate as to how dilutive the deal is going to be to shareholders.  

This is my estimate of the impact to member capital of the proposed combined entity. 

CET1 is the "high quality" capital - a portion of the £5.6 bn referenced above - that is used by regulators to determine how safe a financial organisation is, and governs how much it can lend safely.  It also has an impact on the price at which an organisation can borrow. A key metric that determines the risk within an organisation is therefore the CET1 ratio, expressed as a percentage - which is the amount of CET1 capital divided by the amount of Risk-Weighted Assets (RWAs). RWAs are a measurement of how much has been lent out.

Virgin Money reported in 2023 Common Equity Tier 1 Capital of £3,711 million and a CET1 ratio of 14.7% - this was above their target range, so have since authorised share buy backs to reduce this down (i.e. make it worse), but let's ignore that for now:

3,711 / 14.7% = £25,176 million in risk-weighted assets

Nationwide reported in 2023 Common Equity Tier 1 Capital of £13,733 million and a CET1 ratio of 26.5%: 

13,733 / 26.5% = £51,731 million in risk-weighted assets (RWAs)

So on first inspection, the combined group will have 76,907 million in RWAs. And CET1 of £17,444 less the common equity spent on this deal (i.e. Nationwide member capital).  Call that £2,900 for the acquisition plus a further £1,000 million of restructuring and integration costs (e.g. Bransons £250m exit fee + licensing of the VM brand, IT and people rationalisation).

Then we have 76,907 / (17,444 - 2,900 purchase - 1000 restructuring costs) = 17.6% CET1 ratio.

According to the Nationwide annual report, the Bank of England stipulated Solvency Stress Test (SST) pushed the Nationwide's CET1 down to 17%.  After this deal, based on the above, this is where it would be starting from. Remember that unlike a bank, a building society cannot simply raise equity - there are no shareholders. So this deal will significantly weaken the building society, impacting how much it can lend and at what price i.e. bad for members.