The Metro Bank (LSE:MTRO) share price crashed today after private equity firm Carlyle walked away from takeover talks. Neither party has told investors why the deal is now off the table. Carlyle has stated that it has “agreed to terminate discussions“. The Metro Bank board said they are confident in the bank’s strategy as a standalone entity. The markets took the news badly and sent the Metro Bank share price down 17% at writing. Metro Bank shares were, in fact, down as much as 20% following the announcement.
The fall has erased most but not all of the 25% rise in the Metro Bank stock price after the approach from Carlyle was made public on 4 November 2021.
The Metro bank takeover is off
The timing of the announcement from Carlyle is perhaps a little odd. The consensus opinion was that Carlyle was interested in Metro Bank because the Bank of England might raise interest rates soon. Metro Bank has been struggling to generate profits owing in part to low-interest rates. Yesterday saw the publication of inflation numbers for the UK. Inflation has risen over 4%, well above the Bank of England’s target. Higher than expected inflation combined with the robust labour market numbers reported this week make a rate hike more likely.
Yet, Carlyle has walked away, and the Metro Bank share price has crashed. Since neither party has given any reasons for the talks ending, I can only speculate. Perhaps the Metro Bank board increased the price at which they were willing to consider selling the business on the back of the inflation report, forcing Carlyle to walk away. Maybe the Metro Bank board did the walking after deciding that a private equity firm would be a poor steward of the company.
Challenger banks
This is not the first deal to fall through that involves a challenger bank. In October, J Sainsbury decided against selling its banking business after interest from private equity firm Centerbridge Partners. Sainsbury’s said that the approaches did not “offer better value for shareholders than would be realised through retaining Sainbury’s Bank“.
Two rejections of takeover offers might suggest that the private equity firms are offering less than the challenger banks think they are worth. Again, this is speculation, but where could an idea like this come from? Well, if I look at challenger bank Revolut, I see it has a market cap north of £25bn on annual revenues of around £220m. Metro Bank has a market cap of £228m on revenues of £460m. Of course, Revolut is not a public company, so comparisons are tricky, but the difference is pretty stark.
But Metro Bank has a lot of branches (so does Sainbury’s, but it can add them onto existing stores). Revolut is entirely online and app-based. Metro bank has been growing revenues at 30% per year on average over the last five years, whereas Revolut has managed 226%.
Metro Bank share price crash
I may never know what caused the takeover talks to end. All I do know for sure is that the Metro Bank share price rose when they were announced and crashed when they finished. That suggests investors would have been happy being bought out. Perhaps, that is not surprising given the poor share price performance over the last couple of years.
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James J. McCombie does not own shares in any of the companies mentioned in the article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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