Britannia and Co-op merge into ‘super-mutual’

The Co-operative Financial Services group and Britannia, the UK’s second-largest building society, are to merge to form a “supermutual”, a decision that could lead to consolidation of other smaller mutuals.

The two have been talking since September and on Wednesday announced the deal would form a business with £70bn of assets, 9m customers and 300 branches.

It is made possible by a parliamentary bill to remove legislation that prevents mergers between mutuals and co-operative groups.

Co-operative – owner of internet bank Smile – is part of the Co-operative Group. Interests range from travel and food retailing to pharmacy and funerals, with turnover of £10bn.

Neville Richardson, chief executive of Britannia, who will head Co-operative Financial Services, dismissed suggestions that the deal was spurred by balance sheet weakness: “This is something people are crying out for and this is very much owned by customers.”

The new Co-operative may be able to access the government’s insurance scheme intended to ringfence toxic assets on balance sheets, and its pro-forma tier one capital ratio is about 9.8 per cent.

The combined business will deliver more than £60m a year in cost savings. Branches in the same locations will be merged but compulsory redundancies kept to a minimum.

In August, Britannia reported a sharp fall in first-half 2008 profits, from £50.5m to £31.2m, due to rising bad debts, particularly in buy-to-let loans. on Wednesday, Britannia said profits in the second half would reflect its exposure to two failed banks.

Fitch, the rating agency, said Co-operative’s liquidity and funding position should help support the new group.

But it put the bank on a negative ratings outlook, saying: “Co-operative’s historically strong deposit/loan ratio will be somewhat diluted by the addition of Britannia’s larger wholesale funding component.”

It also raised concerns Britannia’s specialist mortgage portfolio was “more susceptible” to the downturn.

David Anderson, chief executive of Co-operative, will leave the business. Co-operative’s Barry Tootell will become finance director of the new group.

Britannia members will become members of the Co-operative Group subject to a vote in April.

Britannia was advised by Citigroup and Allen & Overy. Co-operative was advised by JPMorgan Cazenove and Slaughter & May.

Britannia has 3m members who are paid a customer loyalty bonus each year. This is calculated according to profits made by the society and how long a customer has been with the mutual.

Instead Britannia members will become members of the Co-operative Financial Services which has around 3m active members to which it pays an annual dividend.

This varies according to how many products the members have and how often they shop in the Co-operative Stores for example.

There will be no cash windfall for members in this deal but Britannia members will pay £1 to join Co-operative which will be deducted from their first dividend payment.

The idea is that by putting the two organisations together and forming a stronger, future profitability and dividends will be improved.

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Mutuals are still a safer haven

Plenty of shareholders in storm-tossed banks must look across the bay to the calm waters of mutuality with envy. Just as they seem to face a choice between oblivion or expropriation, Britannia Building Society and Co-operative Financial Services have laid out plans for a merger to create a so-called “super-mutual”, immune to the vagaries of the stock market. If the mutuals weren’t so nice about it, you might accuse them of deliberately mischievous timing.