BlackRock’s Presence In Mexico To Increase From Acquisition Of Citibanamex’s Asset Management Arm

BlackRock (NYSE:BLK) recently announced that it has signed a definitive agreement with Citigroup (NYSE:C) to acquire the asset management arm of the latter’s subsidiary in Mexico, Citibanamex. The deal, which is expected to be finalized in the second half of 2018, will double BlackRock’s total assets under management in Mexico from $31 billion to $62 billion. More importantly, the acquisition will complement BlackRock’s ETF-focused Mexican unit, which caters primarily to institutional investors by adding more than 50 mutual funds that are popular among retail investors. The combined entity will have assets split about equally among institutional and retail clients.

Additionally, the deal includes a distribution agreement which will allow BlackRock to tap into Citibanamex’s network of 1,500 branches in Mexico to sell its ETF offerings to a client base of more than 20 million. On the other hand, Citibanamex’s divestment will allow it to focus on its core retail banking business while continuing to generate sizable distribution fees through the sale of these investment products to existing and new retail banking customers.

We do not expect the deal to have a material impact on our price estimate of $475 for BlackRock’s stock or our price estimate of $75 for Citigroup’s stock.

See our full analysis for BlackRock | Citigroup

BlackRock is the largest asset manager in the world, with almost $6 trillion in assets under the management. The company is also geographically diversified, and has a presence in 30 key developed and developing nations. Mexico’s high growth potential and the low penetration of asset management services in the country make it a promising target market for BlackRock. This justifies the recently announced deal by BlackRock to acquire Citibanamex’s asset management business in Mexico – a move that will double BlackRock’s market share in the country’s asset management industry.

Now, Citibanamex is the single largest player in Mexico’s mutual fund industry, with the company capturing a 25% share of the market. While BlackRock has a similar base of assets under management in Mexico ($32 billion), all these assets are from its exchange traded fund (ETF) offerings. This makes the two operations complementary to each other in terms of addressing investors’ needs. At the same time, while 73% of BlackRock’s asset base in the country is from institutional investors (with a majority of the assets in equity funds), 70% of Citibanamex’s assets are from retail investors (and significantly tilted towards fixed-income funds).

The acquisition is particularly relevant to BlackRock as it is aligned with its global growth strategy of focusing on retail investors. The retail investing market remains extremely underserved, despite accounting for roughly 30% of all investable assets worldwide. This is because retail investors are generally very sensitive to fund expense ratios, and keeping expense ratios low requires a company to draw on economies of scale to remain profitable.

This is where we believe the BlackRock-Citibanamex deal adds the most value for BlackRock. Not only will the company be able to spread its operating costs over a larger pool of assets, but it will also have access to Citi’s extensive branch network in the country. This will allow BlackRock to improve its profit margins in Mexico going forward – something that should have a positive impact on the company-wide margin figure. You can see how changes in BlackRock’s profit margin impacts the company’s share value by modifying the chart below.

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