For companies considering spinoffs, the best time to generate value for shareholders is when the iron is hot in a particular industry. There's never been a better time than now for companies that manage exchange-traded funds, and one well-known activist investor thinks one huge ETF manager needs to take action sooner than later.
Trian is tryin'
The activist investor in question is billionaire Nelson Peltz, who is well-known for his previous forays into unlocking shareholder value. At Wendy's (NYSE: WEN), he was instrumental in convincing the restaurateur to do an IPO of Tim Hortons (NYSE: THI) in early 2006, and he also oversaw both the union of Wendy's and Arby's as well as its recent divorce, as Wendy's sold off a majority stake in the struggling unit earlier this year.
Peltz also has a reputation at several other companies. He tried to take Family Dollar private with a buyout offer in February, and his Trian Fund Management now holds 10% stakes in Domino's Pizza and mutual fund manager Legg Mason (NYSE: LM). He even had a role in pushing Kraft Foods (NYSE: KFT) to spin off its grocery operations in North America.
The current State of affairs
But what's been making news lately is Peltz's discussion of whether State Street (NYSE: STT) should take action to benefit shareholders. Trian has a $200 million stake in the company, and Peltz recently called out State Street's board of directors to boost profits. In particular, Peltz pointed to giving the company's State Street Global Advisors arm -- which manages the SPDR line of ETFs -- greater independence in operating or potentially spinning it off entirely.
Given the huge growth in the ETF market in recent years, the timing couldn't be better for such a move. BlackRock's iShares division leads the industry with $446 billion in assets, but State Street remains solidly in second place with $267 billion under management. That gives the SPDR manager a big lead over No. 3 Vanguard and its $167 billion.
How State Street will get its (strategic) groove back
Before you get too excited over the prospects of an ETF-company spinoff, bear in mind that the margins on ETFs are razor-thin. With its flagship S&P 500 ETF carrying an expense ratio of only 0.09% and even the popular SPDR S&P Dividend ETF (NYSE: SDY) charging only 0.35%, a quarter-trillion in ETF assets might only produce $1 billion in fee revenue -- and far less in net profit.
But State Street Global Advisors has much more than its ETF division. In all, the company has $2.1 trillion in assets under management, with a whopping $22.76 trillion held in custody as of June 30. That would be a huge spinoff, as those numbers dwarf the assets of State Street's principal banking subsidiary, with total assets of just over $190 billion. By separating asset management from banking, the company would have more freedom to pursue its own strategic interest.
For example, in the rush to offer commission-free ETFs, State Street currently lacks an exclusive dance partner. Although buyout speculation over E*TRADE Financial (Nasdaq: ETFC) could make doing a deal with the discount broker difficult, SPDRs would benefit from having a dedicated distribution partner.
Bring on the spinoffs!
Moreover, a move from State Street could potentially open up a host of other spinoff possibilities in the industry. BlackRock just acquired iShares and so probably wouldn't want to sell it off quickly, but doing an IPO or spinoff of a small part of its float could be interesting. Vanguard, meanwhile, is owned by its fund shareholders, but a transaction akin to how mutual insurance companies demutualized and distributed shares to its investors could unlock immense value.
One thing's for sure: If spinoffs in the ETF industry are going to happen, they should happen now. With the industry enjoying unprecedented popularity, there'll never be a better time for State Street and others to cash in.
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