The Co-operative Bank is in takeover talks with a US private equity firm, as speculation builds that the UK banking sector is heading for a wave of merger and takeover deals.
The bank said it had received an approach from a “financial sponsor with knowledge and experience of investing in European financial services businesses regarding the possibility of a sale of the bank and/or the holding company”. The lender declined to name the suitor but it is understood that New York-based Cerberus Capital Management is behind the bid.
The Co-operative Bank, which has 3.3 million personal customers, 85,000 business clients and 50 branches across the UK, still classes itself as an ethical lender although it was bought out from the Co-operative Group in 2013.
Ryan Brightwell, a director of the Co-operative Bank’s Customer Union for Ethical Banking, said any new owners must maintain the bank’s ethical position or risk losing customers. “If this takeover does go ahead, we’ll be looking for reassurances on that score.” The Cerberus approach was first reported by Sky News.
The lender is currently owned by a group of US hedge funds – including Silver Point Capital, GoldenTree, Anchorage Capital, Blue Mountain and Cyrus Capital – as well as the fund manager Invesco. Together they own 85% of the bank, with the remainder held by a range of undisclosed institutional investors.
The hedge funds took full control from the Co-operative Group, a mutual with 19th-century roots, after launching a £700m rescue deal in 2017. However, the hedge funds have been involved with the bank since 2013, when it had to be rescued after a £1.5bn hole was discovered in its accounts following the disastrous 2009 takeover of the Britannia building society .
Its reputation suffered a further blow when the bank’s former chairman Paul Flowers – dubbed the “crystal Methodist” – pleaded guilty to possession of cocaine, crystal meth and ketamine in 2014.
The Co-operative Bank has struggled to return to profit since, and is currently in the middle of a five-year turnaround plan launched by its ex-chief executive Andrew Bester. Bester stepped down last month, just over two years into the role, and has been replaced by its former finance chief Nick Slape – its sixth chief executive in nine years.
News of the potential bid adds to a list of possible takeovers in the UK banking sector, including Sainsbury’s Bank, which was recently approached by NatWest Group.
Sainsbury’s confirmed it had received a bid on Tuesday, saying: “We have received some very preliminary expressions of interest in the bank, but this does not mean anything will come of these discussions. Our management team remains focused on delivering the plan.”
There are also rumours about the future ownership of TSB, after news broke this week that its owner, Sabadell, is in merger talks with its Spanish rival BBVA.
John Cronin, an analyst at the stockbroker Goodbody, said the industry was ripe for merger and acquisition activity, partly because banks’ market values had tumbled amid fears over a potential surge in defaults linked to the Covid crisis.
Larger lenders are also on the hunt for potential takeovers. Most major banks came into the pandemic profitable and with extra capital, which has only grown since regulators temporarily banned them from paying dividends in March.
Cronin believes regulators may also be more sympathetic to takeovers and mergers that could help lenders deal with low interest rates that have hit revenue. He said they may be more lenient on capital requirements and accounting for so-called badwill – which is generated when a bidders pays less than the value of a company’s assets, and can later be used to offset investment spending and impairment charges.
“It is no great surprise to see that a potential non-bank bidder has surfaced for Co-op Bank given current bank valuations. I suspect we will see more interest emerge to the extent that the shareholders are willing to entertain discussions,” Cronin said.
“I believe this news, together with the expressions of interest received by Sainsbury’s, represents the beginning of an approaching wave of M&A [mergers and acquisitions] in the UK banking industry. Other potential targets include the likes of Virgin Money UK and TSB.”