Great-West Life selling U.S. wealth manager Putnam to Franklin Templeton in deal valued at US$1.8-billion - The Globe and Mail

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The Great-West Lifeco headquarters in Winnipeg is seen in this file photo.JOHN WOODS/The Canadian Press

Canadian insurer Great-West Lifeco Inc. GWO-T is offloading 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 Life 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 $100-million in cash six months after closing.

Great-West’s 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,” chief executive Paul Mahon, said in an interview with the Globe. “We think there’s real upside there and as well the dividend throw off that it’s got a nice yield plus some of the cash proceeds that will be unlocked.

The deal, which is expected to close at the end of the fourth quarter, will also see the insurer, along with its parent company financial behemoth Power Corp. of Canada, form a strategic relationship with Franklin, allocating $25-billion of client assets into Franklin’s specialist investment products within 12 months of closing the deal.

An additional payment of up to $375-million will be paid between three to seven years after close, depending on the growth of the partnership, the companies said in a release.

Great-West Lifeco purchased Putnam for US$3.9-billion in 2007 to expand its U.S presence. The deal also included a US$900-million deferred tax benefit. In 2007, Putnam managed about US$192-billion in assets but struggled with performance and investor redemption in the years following the financial crisis. Now, the company manages about US$170-billion in assets. That includes about $33-billion of assets in Putnam subsidiary PanAgora, a quantitative asset manager that Great-West Lifeco will keep its controlling interest in. (Quantitative managers typically use computer algorithms and historical research in their investing decisions.) Mr. Mahon says PanAgora will be carved out from Putnam and reallocated under Great West Life.

“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,” Scotiabank analyst Meny Grauman wrote in a research note.

While the U.S. fund manager did see some positive sales progress throughout 2020 and 2021 as investors flooded funds with COVID savings, Putnam fell back into redemptions as the industry saw investors begin to pull money out of funds in 2022, Great-West chief executive Paul Mahon, said in an interview with the Globe.

“We acquired Putnam at a difficult time just as the [2008] 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.”

In recent years, Mr. Mahon has been on a U.S. spending spree focused on building the company’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 to buy the retirement business of Prudential Financial Inc. adding $364-billion in assets. 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 are 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 US and growing our leadership position in the retirement space, through Empower and our focus on building the wealth management business,” Mr. Mahon said.

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 Mr. Mahon did not disclose the exact timing of when discussions with Franklin Templeton began, he said Great-West had been “at it” for “for a number of months with them.”

Credit Suisse analyst Joo Ho Kim reported the deal as positive, “given the underperformance” of Putnam on both sales and earnings front 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 reported the deal as a “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.”

Morgan Stanley & Co. LLC and Rockefeller Capital Management served as financial advisors to Great West and Putnam Investments.

- with a file from David Milstead

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