I can’t help but comment on the news story today about Wisdom Tree snapping up the ETC business of ETF Securities. The story is from my colleague Ed Bowsher over at ETF Stream and can be found here – http://www.etfstream.com/news/1853_wisdomtree-buys-exchange-traded-alternatives-business-of-etf-securities.

The top lines are as follows:

  • ETF Securities is selling its European exchange-traded commodity, currency and short-and-leveraged business to WisdomTree Investments, the Nasdaq-listed fund manager. This European ETC platform has $17.5 billion of assets under management spread across 307 products, including the flagship physical gold products PHAU and GBS.
  • Assuming the deal with ETF Securities completes in quarter 1 2018, Wisdom Tree would become the 9th largest ETP sponsor globally with combined assets of $66 billion – it would also be the largest independent ETP provider.
  • The US business is listed on the US market with the ticker WETF, and has a market cap of $1.8 billion based on a share price of $11.94 a share. Wisdom Tree’s share price has increased over the last year, from just under $12 a share to around $15 a share but this deal could prove popular with US shareholders – we understand that the ETF Securities business being sold is solidly profitable.
  • In 2016 Wisdom Tree – traditionally strong in smart beta style equity products (with an income bias) – had revenues of $219m (down from ($298 in FY 2015) and net income of $26m.
  • Terms of the deal have also been announced: $253 million of cash (funded by $200 million of newly issued debt plus $53 million of cash on hand) and stock consideration of 30 million WisdomTree shares.
  • Based on Friday’s market close price, the total consideration is valued at $611 million. By comparison, Invesco’s purchase of Guggenheim’s ETF business brought in assets of $17 billion but the headline cost $1.2 billion.
  • ETF Securities would become a major shareholder in Wisdom Tree. Voting rights associated with the stock consideration will be capped at 9.99% and will represent initial ownership of approximately 18% of WisdomTree’s outstanding common stock on an as-converted basis.
  • The remaining businesses within ETF Securities will include the US business, with a strong footprint in precious metals trackers, the fast-growing Australian business (which has both equities and alternatives funds within the mix) and the Canvas white label ETF platform in Europe.

Now obviously this deal follows hot on the heels of Invesco’s recent purchase of both Source and the US based Guggenheim ETFs business – the latter deal involved $17 billion of assets and that purchase price was over $1.2 billion. By comparison, I suspect that $600m for roughly the same amount of assets is arguably a better deal for wisdom Tree, especially when you consider that the ETC business run by ETF Securities is pretty profitable – or at least that’s what I’ve heard from industry insiders.

My suspicion is that this deal might do wonders for the Wisdom Tree share price – we are expecting an analyst’s call later today at 8am New York time where we’ll hear more details but with a fair wind (barring any deal costs) I wouldn’t be surprised to see Wisdom Tree’s profits double over the next year or so once all those higher margin alternative funds are included. I’d certainly anticipate that this deal will be earnings enhancing.  It also, I think, firmly puts Wisdom Tree itself into touch – as soon as they get AuM over $100 billion it becomes a very tasty morsel for one of the mega banks or mega asset managers looking for a foothold in an exciting market. Time to start dialling up all those Chinese contacts.

But for me the bigger story is that we are now about to see a “battle royale” between Powershares Source and Wisdom Tree in Europe. ETF Securities has always competed with Source in some key markets but the combination of Wisdom Tree’s equities business and the old ETFS focus on alternatives makes it a much more fearsome competitor – even against a well-funded operation such as Invesco. These alternative and smart beta products are much higher margin, and both of these US-based businesses will now draw on their domestic market experience – which means they’ll aggressively chase retail investors with ever more differentiated products.

What will be the battlegrounds? Look at the ETC products being purchased by Wisdom Tree.

  • Hedges against market volatility (gold)
  • Short and leveraged products (high margin and liked by traders)
  • Alternative sources of beta (broad commodity products)
  • Last but by no means least expect Wisdom Tree to shout even more loudly about the importance of smart beta and equity income

Let the battle begin!