Shawbrook plots £3.5bn merger with Co-operative Bank
Private equity-backed small business lender Shawbrook has tabled a stock-based proposal to combine with the Co-operative Bank, Sky News can reveal.
Mark Kleinman
City editor @MarkKleinmanSky
Saturday 5 August 2023 11:46, UK
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A Co-operative Bank in central London, April, 10, 2014.
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One of Britain’s biggest lenders to small businesses is hatching plans for a £3.5bn tie-up with the Co-operative Bank.
Sky News has learnt Shawbrook Group has approached the owners of the Co-operative Bank in recent weeks to outline plans for a stock-based combination of the two companies.
Sources said this weekend the preliminary proposal represented an attempt by Shawbrook to pre-empt a full auction of the erstwhile division of the Co-op Group.
The approach comprised an offer to hand the Co-operative Bank’s shareholders roughly 29% of the combined banking group in a deal that would have valued the target at approximately £800m, they said.
Shawbrook has hired investment bankers at Barclays to advise it on its interest in its smaller, consumer-focused peer.
One added that the indicative offer was unlikely to lead to further talks ahead of a wider auction.
Shawbrook remains interested in a takeover of the Co-operative Bank and is expected to participate actively in that process, which will formally get under way as soon as next month.
On a combined basis, Shawbrook and the Co-operative Bank reported underlying profit last year of nearly £375m.
A tie-up between Shawbrook and the Co-operative Bank would rank among the most significant banking sector deals since the 2008 financial crisis.
It would come as the industry has been buoyed by rising interest rates while simultaneously being shaken by the collapse of Silicon Valley Bank and the emergency takeover of Credit Suisse by Swiss rival UBS.
Other lenders are also expected to explore formal offers for the Co-operative Bank.
OneSavings Bank has long been considered one of its likeliest suitors, although a recent alert that profits would be hit by customers racing to secure new fixed-rate deals has caused some City analysts to question whether it will bid.
Aldermore, Nationwide and Paragon Bank have all also been named as prospective bidders.
Barclays’s role as an adviser to Shawbrook is likely to rule out the major high street bank as a bidder for the Co-operative Bank in its own right.
Shawbrook itself has been the subject of speculation about a transaction that would realise value for its owners, the private equity firms BC Partners and Pollen Street Capital.
A mooted sale process that would have been expected to value Shawbrook at more than £2bn was shelved nearly a year ago as a result of difficult market conditions.
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In the autumn of 2021, the Co-operative Bank approached Spanish-owned TSB about a merger, but talks failed to progress.
A successful sale of the formerly mutually owned bank would come as a relief to regulators which have twice had to play roles in rescues over the last decade.
In 2013, the Co-operative Bank’s bid to acquire the branch network which became TSB was left in ruins when the scale of its own crisis emerged.
It was forced to turn to American hedge funds to secure a £1.5bn rescue, while its former chairman, Paul Flowers, was left humiliated by tabloid revelations about his private life.
The lender then needed a further bailout by investors in 2017, with two major investors – Bain Capital Credit and JC Flowers – subsequently taking a 10% stake in the company.
The remainder of its equity is owned by a syndicate of hedge funds.
Earlier talks about a sale of the Co-operative Bank to Cerberus Capital Management, an often-controversial investor, broke down in December 2020.
PJT Partners and Fenchurch Advisory Partners are advising the Co-operative Bank on its forthcoming sale process.
On Saturday, a spokesman for Shawbrook declined to comment while the Co-operative Bank could not be reached for comment.
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