Virgin Money shares rise 9 percent after CYBG takeover bid

LONDON, May 8 (Reuters) - Shares (Berlin: DI6.BE - news) in Virgin Money rose as much as 9 percent on Tuesday after the British bank said it had received an all-share takeover offer by rival CYBG (Frankfurt: 30712270.F - news) , valuing the group at about 1.6 billion pounds ($2.17 billion).

Shares in other mid-sized lenders Metro Bank (Frankfurt: 6MB.F - news) and OnesavingsBank also rose by 4 percent in response to the takeover offer, a sign that long-awaited consolidation of Britain's so-called challenger banks could be starting.

CYBG (Frankfurt: 42YA.F - news) 's shares recouped early losses to be flat by 0712 GMT, following the announcement of its Virgin bid.

Challenger banks emerged in Britain after the financial crisis to fill a gap in small business lending and attempting to capitalise on problems at the bigger banks.

CYBG, owner of Clydesdale and Yorkshire Bank, made its London market debut in 2016 after it was spun off by National Australia Bank.

It said under its takeover plan Virgin Money would own about 36.5 percent of the combined company. Virgin Money shareholders would receive 1.13 new CYBG shares for each Virgin Money share.

Analysts said the deal, made public on Monday, made logical sense, combining CYBG's more extensive branch network with Virgin's stronger brand, but that the initial offer was too low and would likely be rejected.

"We think Virgin shareholders will be lukewarm on the proposal," said analyst John Cronin at Irish broker Goodbody, adding that he expected a protracted takeover battle could now happen as the two parties jockey over price.

Virgin Money, founded and partly owned by entrepreneur Richard Branson, is investing heavily in a new digital offering while CYBG already has a digital and mobile banking platform called 'B'.

Virgin said on Monday its board was reviewing the CYBG offer.

($1 = 0.7372 pounds) (Reporting By Lawrence White and Sinead Cruise. Editing by Jane Merriman)