Co-operative Bank in shock merger approach to rival lender TSB
The Co-operative Bank has made an audacious approach about a merger with TSB in a move that could trigger a fresh wave of consolidation among Britain’s mid-sized lenders.
Sky News has learnt that the Co-operative Bank contacted TSB’s Spanish owner, Banco Sabadell, earlier this month to gauge its appetite for a deal.
TSB’s Spanish owner has been approached about a sale of the UK lender.
It is understood to have said that it would be willing to pay in excess of £1bn for TSB.
City sources said this weekend that Sabadell had indicated that it was not keen to enter into formal discussions at this stage about a merger of what by some measures are the UK’s seventh-largest and eight-largest banks.
If it did materialise, a tie-up between two of the best-known brands in the sector would create a high street lender with more than 8m customers encompassing mortgages, current accounts, credit cards and savings products.
That would make the combined business larger by customer numbers than Virgin Money, which has approximately 6.5m customers, although it would be smaller than Virgin Money as measured by the size of its loan-book.
It would also remain far smaller than Lloyds Banking Group, NatWest Group, Barclays, HSBC Holdings and Santander UK in terms of market share and high street presence.
Nevertheless, the Co-operative Bank’s approach for TSB was described this weekend by one industry executive not connected to the prospective 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 historic lows for more than a decade.
Analysts have for years forecast a wave of corporate activity that would see mid-sized banks bulk up, although the combination of OneSavings Bank with Charter Court Financial Services and Virgin Money’s tie-up with CYBG have proved to be exceptions.
This week, a takeover of Sainsbury’s Bank by Centerbridge Partners, the US-based investor, fell apart after the supermarket group concluded that it would not deliver value to shareholders.
If the Co-operative Bank did succeed with a formal bid for TSB, it would be a deal laden with corporate irony.
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 financial crisis emerged.
The Co-operative Bank, which at the time was majority-owned by the Co-op Group, one of the UK’s biggest mutuals, was forced to turn to a group of American hedge funds in a £1.5bn rescue deal.
Its former chairman, Paul Flowers, was left humiliated by tabloid revelations about his private life that led to him being dubbed ‘the crystal methodist’, and prompted an overhaul of its leadership and ownership structure.
The ensuing eight years brought further turbulence for both the Co-operative Bank and TSB, however, with the former reliant on another bailout by investors in 2017.
TSB, meanwhile, was plunged into a storm of its own the following year when an IT systems calamity left millions of customers locked out of their accounts for days.
The incident came three years after Sabadell bought TSB from public investors and Lloyds Banking Group, its former parent.
TSB’s future has been the subject of intense speculation since last year when its Spanish owner signalled that it would be open to a sale.
The odds on a short-term deal diminished in the spring, however, when Sabadell indicated that it would delay an auction process.
News of the Co-operative Bank’s unsolicited approach to Sabadell is likely to trigger interest from other suitors for TSB, which operates nearly 300 branches.
It comes just weeks after TSB confirmed the appointment of Nick Prettejohn, a City veteran, as its new chairman.
The Co-operative Bank’s ability to propose a transaction of this scale underlines its recent recovery, having announced an underlying profit of nearly £13m for the first half of 2021.
It has itself been on the receiving end of takeover interest, although talks about a sale to Cerberus Capital Management, an often controversial investor, broke down last December.
A merger with TSB would almost certainly make a medium-term exit for both Sabadell and the Co-operative Bank’s owners easier to execute, potentially through a public share sale.
In April, two major investors – Bain Capital Credit and JC Flowers – took a 10% stake in the Co-operative Bank, which some analysts interpreted as a sign that it would become more proactive in its approach to industry consolidation.
The lender’s other shareholders include GoldenTree Asset Management and Silver Point Capital, two US-based hedge funds.
Credit Suisse is advising the Co-operative Bank, while Goldman Sachs has been retained by Sabadell to advise on the future of TSB.
A Sabadell spokesman said: “This is not a transaction that we wish to explore at this moment, as we have previously expressed publicly.”
The Co-operative Bank and TSB declined to comment.
Rachel Reeves has said she is determined to “defy” forecasts that suggest she will face a multibillion-pound black hole in next month’s budget.
Writing in The Guardian, the chancellor argued the “foundations of Britain’s economy remain strong” – and rejected claims the country is in a permanent state of decline.
Reports have suggested the Office for Budget Responsibility is expected to downgrade its productivity growth forecast by about 0.3 percentage points.
Rachel Reeves. PA file pic
That means the Treasury will take in less tax than expected over the coming years – and this could leave a gap of up to £40bn in the country’s finances.
Ms Reeves wrote she would not “pre-empt” these forecasts, and her job “is not to relitigate the past or let past mistakes determine our future”.
“I am determined that we don’t simply accept the forecasts, but we defy them, as we already have this year. To do so means taking necessary choices today, including at the budget next month,” the chancellor added.
She also pointed to five interest rate cuts, three trade deals with major economies and wages outpacing inflation as evidence Labour has made progress since the election.
Speculation is growing that Ms Reeves may break a key manifesto pledge by raising income tax or national insurance during the budget on 26 November.
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Chancellor faces tough budget choices
Although her article didn’t address this, she admitted “our country and our economy continue to face challenges”.
Her opinion piece said: “The decisions I will take at the budget don’t come for free, and they are not easy – but they are the right, fair and necessary choices.”
Yesterday, Sky’s deputy political editor Sam Coates reported that Ms Reeves is unlikely to raise the basic rates of income tax or national insurance, to avoid breaking a promise to protect “working people” in the budget.
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Tax hikes possible, Reeves tells Sky News
Sky News has also obtained an internal definition of “working people” used by the Treasury, which relates to Britons who earn less than £45,000 a year.
This, in theory, means those on higher salaries could be the ones to face a squeeze in the budget – with the Treasury stating that it does not comment on tax measures.
Read more: The taxes Reeves could raise
In other developments, some top economists have warned Ms Reeves that increasing income tax or reducing public spending is her only option for balancing the books.
Experts from the Institute for Fiscal Studies have cautioned the chancellor against opting to hike alternative taxes instead, telling The Independent this would “cause unnecessary amounts of economic damage”.
Although such an approach would help the chancellor avoid breaking Labour’s manifesto pledge, it is feared a series of smaller changes would make the tax system “ever more complicated and less efficient”.
KitKats, Gaviscon, toothpaste, and even Freddo have all fallen victim to shrinkflation, consumer group Which? has found.
As families struggle with the cost of a trip to the supermarket, a survey of shoppers revealed how many products are getting smaller – while others are being downgraded with cheaper ingredients.
Among the examples are:
• Aquafresh complete care original toothpaste – from £1.30 for 100ml to £2 for 75ml at Tesco, Sainsbury’s and Ocado
• Gaviscon heartburn and indigestion liquid – from £14 for 600ml to £14 for 500ml at Sainsbury’s
• Sainsbury’s Scottish oats – from £1.25 for 1kg to £2.10 for 500g
• KitKat two-finger multipacks – from £3.60 for 21 bars to £5.50 for 18 bars at Ocado
• Quality Street tubs – from £6 for 600g to £7 for 550g at Morrisons
• Freddo multipacks – from £1.40 for five bars to £1.40 for four bars at Morrisons, Ocado and Tesco
Which? also received reports of popular treats missing key ingredients, as manufacturers seek to cut costs.
The amount of cocoa butter in white KitKats has fallen below 20%, meaning they can no longer actually be sold as white chocolate.
It comes after Penguin and Club bars lost their legal status as a chocolate biscuit, as they now contain more palm oil and shea oil than cocoa – as reported in the Sky News Money blog.
Which? retail editor Reena Sewraz called on supermarkets to be “more upfront” about price changes to help households “already under immense financial pressure” get better value.
While keeping track of the size and weight of products can be tricky, Which? has two top tips for detecting shrinkflation.
The first is to be wary of familiar products labelled as “new” – because the only thing that’s new may end up being the smaller size.
Meanwhile, the second is to pay attention to how much an item costs per 100g or 100ml, as this can be an easy way of finding out when prices change.
What have the companies said?
A spokeswoman for Mondelez International, which makes Cadbury products, said any change to product sizes are a “last resort”, but it’s facing “significantly higher input costs across our supply chain” – including for energy.
A Nestle spokesman said it was seeing “significant increases in the cost of coffee”, and some “adjustments” were occasionally needed “to maintain the same high quality and delicious taste that consumers know and love”.
“Retail pricing is always at the discretion of individual retailers,” they added.
A spokesman for the Food and Drink Federation also pointed to government policy, notably national insurance increases for employers and a new packaging tax.
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Is inflation reaching its peak?
Fresh food prices on the rise
The Which? report comes as latest figures showed fresh food costs 4.3% more than it did a year ago.
The increase in October, reported by the British Retail Consortium (BRC) and market researchers NIQ, was up on the 4.1% year-on-year rise in September.
Overall food inflation was down slightly, though, to 3.7% from last month’s 4.2%.
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There has also been a slowdown in overall shop price inflation, which the BRC said was down to “fierce competition among retailers” ahead of Black Friday sales.
The annual shopping extravaganza will this year arrive in the same week as the chancellor’s budget, which is set for Wednesday 26 November.
BRC chief executive Helen Dickinson called on Rachel Reeves to help “relieve some pressures” keeping prices high, with the national insurance rise in last year’s budget having “directly contributed to rising inflation”.
“Adding further taxes on retail businesses would inevitably keep inflation higher for longer,” Ms Dickinson warned.
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