Invesco's Buy a Good One

When rumors broke in early August that narrow-moat-rated

While the deal adds some scale to PowerShares, lifting Invesco's total ETF AUM to $166 billion, it will still be a distant fourth-place player, with just over 5% share of the $3.1 trillion U.S.-based ETF market--an industry that is dominated by BlackRock/iShares (39%), Vanguard (25%), and State Street/SSgA (18%). The real value for Invesco in the deal, though, is Guggenheim's ability to self-index, as just a handful of firms have received permission from the SEC to develop and launch products based on their own indexes, as opposed to licensing them from index providers. This allows them not only to create customized products that can quickly meet investor demand, but also to capture more of the fee revenue generated by its ETF products (not having to pay a licensing fee for the index).

We expect the deal, which is costing Invesco $1.2 billion (composed of 85% debt and 15% cash), to have only a minimal impact on our $37 per share fair value estimate. The addition of another $37 billion in faster-growing but lower fee-generating assets to the company's $907 billion in total AUM at the end of August will (at best) add a dollar or two to our valuation. That said, the change in our estimate is likely to be at the upper end of that range, as Invesco's AUM levels have also risen since our last update.

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