Canadian insurer Great-West Lifeco Inc. is off-loading U.S. wealth manager Putnam Investments to investment giant Franklin Templeton in a deal valued at US$1.8-billion, a fraction of what the insurer initially paid for the operation.
The two asset managers announced Wednesday that Franklin Templeton will initially pay Great-West US$950-million to US$1-billion in a combination of cash and stock. Franklin Templeton will issue 33.33 million shares to Great-West at closing and US$100-million in cash six months after closing.
Great-West’s GWO-T shares will represent a 6.2-per-cent ownership stake in parent Franklin Resources Inc., and it has agreed to hold at least 4.9 per cent of Franklin Resources for at least five years.
“The economic benefits to us will be the appreciation in the Franklin stock, which we think it’s actually undervalued,” Great-West chief executive Paul Mahon said in an interview with The Globe and Mail. “We think there’s real upside there, as well as the dividend throw-off that has a nice yield, plus some of the cash proceeds that will be unlocked.”
The deal with Franklin opens the door for Great-West to reap future value from the asset manager, which has been an underwhelming performer on Great-West’s books for years, with Putnam’s assets under management dropping by more than 12 per cent since 2007.
Great-West purchased Putnam for US$3-billion in 2007 as part of a US$3.9-billion transaction that included a US$900-million payment for Putnam’s minority interest in private equity group Thomas H. Lee Partners and a deferred tax benefit.
At the time, Putnam managed about US$192-billion in assets, but it then struggled with performance and investor redemption in the years following the 2008-09 financial crisis. Today, the company manages about US$170-billion in assets, which includes US$33-billion of assets in Putnam subsidiary PanAgora Asset Management, a quantitative asset manager in which Great-West will retain its controlling interest.
“Although we had no indication that a sale of Putnam was imminent, it is also not a total shock given years of struggling performance at the asset manager along with veiled management comments that a sale was certainly a strategic option,” Bank of Nova Scotia analyst Meny Grauman wrote in a research note.
Under the deal, Franklin Templeton will also make an additional payment of up to US$375-million between three to seven years after close, depending on the growth of the partnership, the two companies said in a release. The value of PanAgora – along with seed capital invested in the firm by Putnam and closing adjustments – is estimated to be between US$375-million and US$425-million.
Mr. Mahon said he had considered a number of opportunities in the past to sell Putnam, but none of the potential buyers were a “good fit.” While he did not disclose the exact timing of when discussions with Franklin Templeton began, Mr. Mahon said Great-West had been “at it” for “a number of months with them.”
Putnam did see some sales progress throughout 2020 and 2021, as investors flooded funds with COVID-19 savings, but the wealth manager fell back into redemptions during an industry downturn, as investors begin to pull money out of funds in 2022, Mr. Mahon said.
“We acquired Putnam at a difficult time just as the [2008-09] financial crisis was setting in, so obviously there was a bit of a reset at that point in time,” he said.
“There was a bit of a dislocation in markets in the last couple of years as we got into COVID and the net impact of that was the industry went into outflows and Putnam followed that same stream. So, while we were seeing good progress around 2021, we believe that as Putnam went into outflows, the best move really was to look to a transaction to unlock value and to get it to scale,” Mr. Mahon said.
In recent years, Mr. Mahon has been on a U.S. spending spree focused on building Great-West’s presence in the U.S. retirement industry through its subsidiary, Empower Retirement.
In 2021, Empower spent US$3.55-billion, in its largest deal ever, to buy the retirement business of Prudential Financial Inc., adding US$314-billion in assets under administration.
In June, 2020, Empower purchased digital wealth manager Personal Capital for an initial US$825-million, with the potential to add US$175-million if certain growth metrics were met. The same year, Empower bought the retirement business of Massachusetts Mutual Life Insurance Co. for US$3.35-billion, adding US$167-billion in assets and approximately 2.5 million clients to its roster.
“The deal with Franklin allows us to further our focus in the U.S. and growing our leadership position in the retirement space, through Empower and our focus on building the wealth management business,” Mr. Mahon said.
The deal is expected to close at the end of the fourth quarter and will also see the insurer, along with its parent company, financial behemoth Power Corp. of Canada, form a strategic relationship with Franklin. Great-West will allocate $25-billion of client assets into Franklin’s specialist investment products within 12 months of closing the deal.
Franklin Templeton is one of the U.S. investment giants, managing about US$1.4-trillion in assets, as of April 30. The California-based asset manager operates in more than 30 countries, including Canada.
Credit Suisse analyst Joo Ho Kim said the deal is positive, “given the underperformance” of Putnam on the sales and earnings fronts over the years.
“It would also allow Great-West Life to better focus on expansion of its retirement business in the U.S.,” Mr. Kim wrote. “We also see modest value creation on fundamental front, as Franklin Templeton expects to add run-rate operating income of US$150-million in the first year post-close and cost synergies.”
Scotiabank analyst Phil Hardie said in a note that the deal is “an important step” forward for parent company Power Corp.
“We believe the latest move related to divestiture at Great-West enables it to focus on its core growth strategy and removes a historical overhang,” Mr. Hardie wrote. “Putnam had likely weighed on investor sentiment towards Great-West and Power for years, given its struggles with profitability.”
Franklin Resources’ share price fell 2.8 per cent to US$24.01 on the New York Stock Exchange. Great-West fell 0.6 per cent to $38.43 in Toronto.
Morgan Stanley & Co. LLC and Rockefeller Capital Management served as financial advisers to Great-West and Putnam for the deal.
With a report from David Milstead.