The Desmarais family signalled it wants insurer Great-West Lifeco Inc. to join the top ranks of U.S. money managers yesterday with the $4.6-billion acquisition of Putnam Investment Trust, the 10th-largest U.S. mutual fund company.
Great-West is buying a Boston-based money manager with $225-billion in assets and global reach, and betting that Putnam will rebound from poor fund performance and the 2003 market-timing scandal.
Putnam parent Marsh & McLennan Cos. Inc. put the unit up for sale in September as the insurance brokerage moved to streamline its businesses.
Winnipeg-based Great-West is a strong player in all sectors of the Canadian insurance market, but its U.S. operations are focused on group life insurance.
Chief executive officer Raymond McFeetors said the company decided in July of 2005 to bulk up its offerings of retirement savings products, "so we've been looking at mutual fund companies for two years."
"The U.S. asset management industry is just starting to consolidate. My view is we will end up with half a dozen companies, each with well over a trillion dollars under management," said Mr. McFeetors, who added that Great-West is "a proven consolidator" that aspires to be in that elite group.
U.S. mutual fund leader Fidelity Investments has $2.9-trillion in assets.
Great-West has $197-billion in assets, so the Putnam acquisition doubles the company's size to $422-billion.
The insurer is 71 per cent owned by Power Financial Corp., a holding company controlled by Power Corp. of Canada, all of which are part of the Desmarais family's empire.
The Montreal-based conglomerate is already the top player in the domestic fund industry as the owner of IGM Financial Inc., parent to Investors Group and Mackenzie Financial Corp., which together have $107-billion of assets.
Putnam CEO Charles Haldeman and his team will remain in place and will own 4 per cent of the company, compared with management's current 11-per-cent stake.
"Uncertainty in ownership was troublesome in the marketplace," said Mr. Haldeman, who joined Putnam three years ago as part of an executive housecleaning. The Harvard MBA said he looked forward to boosting sales and cutting costs with Great-West's help and moving profit margins that are now under 20 per cent back to industry norms of 28 per cent.
"They can teach as a lot, and challenge us a lot," Mr. Haldeman said.
Power Financial chairman Robert Gratton said his company's due diligence with stockbrokers and institutional investors showed Putnam is coming back.
"The trend is clear. We've done extensive blind surveys during the due diligence," Mr. Gratton said. He said Great-West, not IGM Financial, was the natural buyer of Putnam because of its extensive U.S. operation.
Great-West won a hotly contested five-month auction, with a number of U.S. and foreign money managers bidding on Putnam. This deal was finally signed early yesterday morning in the lobby of Toronto's Four Seasons Hotel, only after the executives' last-minute negotiations were interrupted by the noisy arrival of a visiting NBA team, the Washington Wizards.
Putnam is a 70-year-old franchise that represents one of the better-known mutual fund brands. The company's recent woes mean Great-West is buying at a discount price: Putnam is changing hands at 14.5 times earnings in a sector that typically commands 22 times earnings.
Analysts agree there is a potential market leader in this union if investors continue to return to Putnam, which boasted $420-billion (U.S.) of assets just five years ago.
"Upfront financial benefits look slim, but we credit Great-West with the ability to foster improvement over the medium term and drive acceptable economics," said insurance analyst Jason Bilodeau at UBS Securities.
As part of the purchase, Great-West also acquires Putnam's 25-per-cent ownership stake in one of the leading U.S. private funds, T.H. Lee Partners. The $12-billion Boston-based fund has been around since 1974, and has been called "the teddy bear at the gate" because of its preference for friendly deals. T.H. Lee has owned companies such as Snapple and Dunkin' Donuts.
To finance the deal, Great-West has figured a way to cash in on future Putnam tax deductions related to the goodwill incurred in the purchase.
Great-West will use what's known as a "securitization" to raise $644-million (Canadian), a sum that will be paid back as Putnam generates future tax benefits.
In addition, Great-West plans to sell up to $1.2-billion of shares, with Power Financial ready to purchase a portion of this equity. The insurer will borrow up to $1.6-billion to finance the remainder of the purchase.
Great-West was advised by Morgan Stanley. Marsh's financial advisers were Goldman Sachs Group Inc. and Merrill Lynch & Co.
New York-based Marsh, the world's largest insurance brokerage, is expected to use the money from the sale to pay down debt and expand its Mercer consulting and Kroll security units.
Great-West shares closed up 35 cents yesterday at $34.84 on the Toronto Stock Exchange, while parent Power Financial saw its stock rise 95 cents to close at $38.52.
Power Corp. patriarch Paul Desmarais Sr., Canada's fifth-richest man, got his start in business by buying his parents' bus company in Sudbury for a dollar in 1951. He now heads the 31st-largest company on the Standard & Poor's/TSX composite index. Power Corp. of Canada has a market value of $16-billion, and Mr. Desmarais Sr. has a net worth of $4.41-billion, according to Canadian Business magazine.
Mr. Desmarais Sr. began his foray into financial services by buying control of insurer Imperial Life for about $12-million in 1963. He then acquired Montreal newspaper La Presse, and by 1968 had gained control of Power Corp., at one time an electric utility. Through a web of holding companies, the Desmarais family controls fund firm IGM Financial Inc. and insurer Great-West Lifeco Inc.
TEXT: BLOOMBERG NEWS
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