For sale – Xtrackers on the auction block?

The merger talks between Germany’s two biggest banks Deutsche Bank and Commerzbank could have a market defining impact on the ETF sector in Europe.

Talks concerning German banking’s zusammenschluss are currently underway and according to reports one potential outcome from the discussions would be the sale of Deutsche Bank’s controlling stake in its DWS asset management business.

Analysts who have crunched the numbers believe the sale of DWS would be a pre-requisite for the deal as the money raised would go towards funding the redundancies envisioned across the banking group. Sitting within DWS is, of course, the Xtrackers ETF business, the second biggest franchise in Europe.

The banking analyst team at SocGen believe the sale of Deutsche Bank’s 78% stake in DWS would raise up to €5bn. In a note issued to clients in mid-March, Citi – which has DWS as a buy – suggested the reorganisation of the business as a separate entity meant the company could achieve “stronger flow recovery” and more cost synergies than was reflected in the current share price.

But in viewing DWS as an attractive business, the Citi team also suggested that any move would see Deutsche Bank exiting as a shareholder.”The DWS self-help story remains attractive, but value crystallization could be accelerated by a bid for the group,” the analysts wrote.

“However, we would see control of DWS as a necessary outcome of any bid, for a significant premium to the current price to be achievable. The big question is whether this is something that Deutsche Bank will consider.”

The Citi team added that Deutsche Bank has also already indicated that current service contracts between the bank and the asset manager are not considered an obstacle to a sale.

Shopping lists

Thoughts have obviously immediately turned to potential buyers. Names already mentioned include Amundi, Allianz and Pioneer, all big institutional and retail fund managers with an eye for enhancing their European assets under management. SocGen, meanwhile, suggest that US asset managers may also enter the bidding.

What is clear, though, is that while the Xtrackers business clearly has a strong position within the European ETF space, it will not be the central reason for any buyer to lay down hard cash. This is not to downplay the Xtrackers position within the space; as it stands the business controls circa 14.5% of the total European market, second only to the BlackRock iShares behemoth.

However, in the DWS firmament, the passive business remains very much second-fiddle to the active management side of the operation.

In terms of AUM by asset class, the biggest element of the DWS business is active fixed income at 34% of the total of €662bn as of the end of 2018 or €225bn. Active equity and active multi-asset combined were worth 19% or €126bn and active SQI was worth another 9% or €59bn. The passive element of the AUM as of the end of the year stood at around 18% or circa €112.5bn; still sizeable but clearly not the main focus at DWS or, arguably, its acquirer.

“I would not want to overstate the importance of Xtrackers to DWS,” said Peter Sleep, senior investment manager at 7IM. “Passive is only 18% of assets and it is relatively low margin. Having said that, Xtrackers enjoys net inflows and has 14.5% market share in Europe.”

Opportunity knocks

Indeed, if an acquirer wishes to either gain or bolster their foothold in the European ETF space – and at size – then this is clearly the best opportunity.

The recent trend towards consolidation within the European ETF space has been in train for a while now and spaces at the top table come at a premium. Clearly, some of the names mentioned would be attracted by the market position of the Xtrackers range – Amundi, for instance, would be vaulted into a strong second position from its current status lower down the rungs.

Moreover, the spread of DWS’ interests might mean it makes sense for a further break up. It is possible an acquirer for the DWS active business might be willing to split off Xtrackers.

This would offer up the potential for a pure-play entry into the mainstream of European ETFs. JP Morgan would also be an interesting buyer given its recent entry into the ETF space, particularly as an acquisition of Xtrackers would give it the platform to enter the vanilla ETF arena.

A recent analysis on market entry noted that most new entrants in the European ETF space were likely to take the niche approach to market entry, deeming the mass market passive area to be too competitive, not least on price. Hence, the chance to get a leg up via the Xtrackers brand is unlikely to be repeated any time soon.

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