Chelsea and Yorkshire building societies in merger talks

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The Yorkshire and Chelsea building societies are in advanced talks about a merger that could be put to members within the next few days, the two groups confirmed yesterday.

A source close to the negotiations said that a deal, which would create a mutual society with assets of £35bn, was "very close", although a final rubber stamp will be subject to the approval of the societies' 2.7 million members. Unlike other mergers in the sector in recent years, a windfall for members is unlikely, as both groups are keen to conserve cash.

The talks were initiated by Chelsea, which was forced to write off £41m in August after fraudulent activity in its buy-to-let and self-certification mortgage businesses. The problem led to a £26m loss in the first half of the year.

The trigger to the discussions with Yorkshire was the appointment in the same month of Stuart Bernau as chairman and chief executive. Mr Bernau has started a strategic review and has made no secret of his ambition to forge a tie-up with a bigger society.

Yorkshire has largely come through the financial crisis unscathed thanks to its lack of exposure to the buy-to-let market. Yorkshire is also likely to insist on a radical restructuring of Chelsea's balance sheet, with £200m of subordinated debt – which pays higher returns to investors, but which is less likely to be repaid in the event of Chelsea defaulting – set to be converted into convertible equity notes, which change into an instrument similar to equity if a company's capital position deteriorates.

Both groups have already been involved in the wave of consolidation seen across the mutual sector since the credit crunch, with the Chelsea taking over the Catholic Building Society, and Bradford-based Yorkshire taking over its smaller rival Barnsley Building Society last year.