Metro Bank’s branch-focused business model and an expensive bond issue in October deterred several big private equity firms from making takeover bids for the lender this year even though its share price fell by nearly 90 per cent.
The UK challenger bank became a potential target for buyout firms following a reporting scandal in February that resulted in senior managers being investigated by regulators and left it without a permanent chief executive or chairman.
But firms including Warburg Pincus, BC Partners, Blackstone and Centerbridge decided not to bid for Metro after assessing the lender around the time of the bond deal, people familiar with the groups said.
New York-based private equity group JC Flowers also considered the bank, but it is unclear whether the firm remains interested. One person said Cerberus, which has previously done several deals with Metro, also weighed a possible bid. The buyout firms declined to comment.
The reluctance from several of the most prominent investors in financial services demonstrates the barriers to a potential takeover of Metro.
However, the Conservative party’s election victory this month led investors to predict a surge in dealmaking that could encourage some firms to reconsider.
“The fact some of the [political] uncertainty has been removed will give some people more confidence,” said one person close to the bank. “But you do have to believe in the model, there’s no getting away from that.”
While Metro Bank has been able to build a stock of cheap deposits — it reported 1.9m customer accounts and £14.2bn in deposits in its Q3 trading update — it has had less success growing a profitable loan book in a competitive UK environment.
One person who considered a bid said Metro’s branch expansion at a time when established lenders were closing theirs was part of “the reason nobody’s invested”. Metro has about 70 branches across the UK with plans for further expansion.
Some observers have raised concerns about private equity firms buying banks due to the risk of rising leverage. However, a senior member of staff at a UK regulator said that if Metro ran into any more difficulties, authorities would prefer a buyout to an alternative that might put customers at risk.
Kiran Sharma, a deals lawyer at Ropes & Gray in London, said Metro’s lack of cash generation could make it less attractive to traditional private equity firms but it may hold greater appeal to funds focusing on special situations or distressed assets, or another bank.
The cost of servicing £350m of new debt, raised in October with a record 9.5 per cent coupon, means Metro is not expected to return to profit until 2021.
The bank is also under investigation by the Bank of England’s Prudential Regulation Authority and Financial Conduct Authority over the circumstances of its reporting error.
John Cronin, analyst at Goodbody, said any takeover deal would be “very challenging” even after the investigations were completed. However, he added that Metro could be attractive to a firm that already owned a lending business.
BC, Blackstone and JC Flowers are among the most experienced private equity firms operating in the UK banking sector. BC owns Shawbrook Bank, Blackstone owns Kensington Mortgages, and JCF created OneSavings Bank.
Analysts have suggested the hedge fund Elliott Management, which owns Chetwood Financial, could be another possible suitor. However, two people close to Elliott said it had no plans to make a move for Metro.
Metro declined to comment. The bank’s board will outline its turnround plan in February. In October, outgoing chief Craig Donaldson said it would treat any takeover bid “with the right respect”.
Get alerts on Metro Bank when a new story is published