Will City investors rise to the challenge of backing challenger bank Shawbrook?

Its biggest shareholders want to take it private, but their bid is hardly a slam dunk

Will City investors back Shawbrook Bank?

It’s rare to find a board willing to resist big shareholders trying take out their business on the cheap, but the directors of challenger bank Shawbrook have done just that.

They’ve told the private equity firms trying to take the bank over to get knotted despite their having sweetened their hostile bid with an extra 10p a share, valuing the outfit at just under £870m.

Now, will their investors show similar resolve?

Pollen Street Capital, which owned Shawbrook before floating it a couple of years ago, and its ally BC Partners own 38.8 per cent of the shares.

Their consortium has structured the offer so that they only need 50 to win the day and they were at 45.4 per cent before yesterday’s “final” offer was tabled. As a result, this one is likely to go down to the wire.

The 10p a share extra might be enough for at least some of the hold outs (and they have several days before they have to make a decision).

What might persuade them to jump is that stock will inevitably take a dive if the deal doesn’t go ahead.

Moreover, the fortunes of this bank, which specialises in lending to small and medium sized businesses, are closely linked to the UK economy.

The outlook for that is murky at best, particularly given the low quality of the people likely to make up a Conservative Government after the election, and the juvenile and nationalistic approach they have taken towards Brexit.

Interest rates are at low levels, making it hard for banks to make money (and for smaller outfits to compete) and, if the Bank of England is right and the current bout of inflation is only temporary, that’s not going to change any time soon.

That said, what investors should remember is that private equity firms have a history of buying good companies on the cheap, only to sell them back to institutions by re-floating them on the stock market at higher prices a few years down the line.

It’s a shallow trick, but it is one that has worked time and again.

The offer, a premium of about 30 per cent to what the shares were trading at before the bidders’ interest became known, is no slam dunk and investors with a time horizon longer than a few months might like to ask themselves what made the consortium’s members so keen to table it. Perhaps it’s because they see an opportunity to take back the bank, which has been growing quite nicely, for a knockdown price.

Even in a bad economy there should be opportunities for a business operating in a niche that the big boys haven’t done terribly well with, and Shawbrook’s directors aren’t alone in their belief that the bid under values the business. Shore Capital’s Gary Greenwood and Investec’s Ian Gordon have expressed similar sentiments.

Shawbrook’s directors are to be commended for facing down and fighting the bidders.

Now, it’s down to the institutions that will decide the bank’s fate to be similarly steely.

The record of big city investors in circumstances like these is not good. But perhaps they’ll spring a surprise this time around.