A single blockbuster deal has made Great-West Lifeco Inc. a major player in the U.S. investment market, and a force to be reckoned with in the global mutual funds sector.
The financial services giant pulled off both feats with the C$4.6- billion acquisition of Boston-based Putnam Investments Trust from Marsh & McLennan Cos. Inc. of New York. The deal includes a 25% stake in private-equity firm T.H. Lee Partners and a securitized acquisition tax benefit, projected to be about US$550 million.
The addition of Putnam — the tenth-largest mutual fund firm in the U.S. with US$192 billion in assets under management — is by far GWL’s biggest deal in the U.S. to date. It’s also on par with the two acquisitions that made the Winnipeg-based GWL the dominant player in Canada’s insurance sector.
“This is big time. Putnam is an asset manager on a world scale. This deal is on the scale of London Life [Insurance Co.] or Canada Life [Assurance Co.],” says GWL chief executive Ray McFeetors, referring to the insurers GWL acquired, respectively, for $2.9 billion in 1997 and $7.3 billion in 2003.
GWL says Putnam acquisition is not being amalgamated and will continue to operate under its own brand and management, as Canada Life and London Life did after they were acquired.
The Putnam deal will no doubt give a significant boost to the percentage of net income attributed to GWL’s U.S. operations. Last year, 27% of its profits came from the U.S., along with 25.7% from Europe and 47.2% from Canada.
GWL expects the acquisition to be accretive to earnings before restructuring charges in its first year. Scheduled to close before the end of June, the deal is being financed from internal resources, as well as the proceeds of an issue of GWL shares not exceeding $1.2 billion, the issuance of debentures and hybrids, a bank credit facility and a U.S. tax benefit.
The US$550-million tax benefit arises under U.S. tax law. “We’re able to deduct that against income, going forward,” McFeetors says. “That produces a cash-flow stream, and we’re going to sell that for its present value. This is the first time a deal like this has been done in the U.S.”
Since the purchase of Canada Life, GWL has posted solid financial results. In 2006, net income was $1.88 billion on revenue of $27.3 billion, an increase of more than 7% from $1.74 billion net income on revenue of $23.9 billion in 2005.
The Putnam acquisition has been embraced by the market. Analysts who cover the U.S. financial services sector are bullish on GWL’s move, as well as on its prospects in the multitrillion-dollar market. GWL shares have repeatedly hit new 52-week highs, surpassing $36. Five years ago, the shares were trading at half that price.
In a research report, Scotia Cap-ital Inc. analyst Tom MacKinnon predicted GWL’s stock price will go even higher. His one- and two-year targets for the shares are $38 and $42, respectively.
“We believe the attractively financed deal has limited downside and provides an opportunistic entry point into a business that only makes sense in the long run,” says MacKinnon. “There’s no question in our minds that if you’re in the retirement business in the U.S., it makes sense to be in the U.S. mutual fund business, provided you can find an attractive entry point.”
The Putnam addition “absolutely” makes GWL a player in the U.S. big leagues, says Peter Demmer, chief executive of Sterling Re-sources Inc. , a New Jersey-based consultancy to the retirement services industry.
“This is a very big move,” he says. “It’s already received a lot of notice [in the U.S.]. It definitely puts GWL on the map in the U.S. asset-management community, and it complements some of its other business lines quite nicely.”
GWL is now in the same rarified stratosphere as insurers such as ING U.S. Financial Services, AIG (American International Group), Prudential Insurance Co. of America and Principal Financial Group, Demmer says. And GWL is poised to challenge money managers such as CitiStreet, Vanguard Group and Charles Schwab Corp.
“The 800-pound gorilla is still probably beyond anyone’s scope,” he adds, referring to the long-time dominant fund firm in the U.S., Fidelity Investments Corp.
GWL wasn’t very well known three or four years ago, but is now “unquestionably” one of the major firms in the U.S. investment industry, says Bob Wuelfing, president of RG Wuelfing & Associates, a Connecticut-based market research and consulting firm.
@page_break@“For the mid-sized businesses GWL has historically gone after, [Putnam is] an excellent acquisition,” he says. “Putnam enables GWL to be a major player in the mutual fund and institutional asset-management business. A lot of companies have to do multiple acquisitions in order to do that. GWL did it in one fell swoop.”
Until now, GWL had primarily built up its U.S. business — Denver-based Great-West Life & Annuity Insurance Co. — by purchasing individual books of business in the health-care and defined-contribution pension areas. But it has also had significant organic growth. The biggest deal was last year’s acquisition of the corporate defined-benefit pension business of New York-based Metropolitan Life and a pair of its subsidiaries. The deal, for which no purchase price was released, added US$7.5 billion in assets to GWL&A.
“Asset management is an area in which we’re very comfortable. We know it well,” McFeetors says. “We’re in the retirement business in the U.S. If you’re in that, you have to be in mutual funds. It’s a US$7.2- trillion market. It’s grown dramatically in the past year and we expect it to continue to grow. If you want to be in the retirement space in the U.S., you want to be in mutual funds in as big a way as you can.”
McFeetors notes that Putnam may not be GWL’s final acquisition in the U.S.: “We still may buy a life insurer. We’re looking to grow both organically and through acquisitions. We closed four deals in the fourth quarter of last year and reached an agreement on a fifth. It was a pretty good year.”
He adds that GWL will continue to explore growth opportunities in Europe, its other main geographical region.
It shouldn’t be too surprising that GWL bought a mutual fund company, McFeetors continues. After all, London Life Insurance Co. has run Quadrus Investment Services Ltd. , its mutual fund arm, for more than six years, accumulating more than $5 billion in AUM in the process. Its sister companies under the Power Financial Corp. umbrella, Investors Group Inc. and Mackenzie Financial Corp. , combine to form the biggest mutual fund company in Canada, with more than $120 billion in AUM. Assets under GWL’s Maxim brand of mutual funds in the U.S. are closing in on US$7.5 billion.
McFeetors says he and his team were attracted to Putnam because of its size, the fact it’s one of the most recognizable investment brands in the world and was being sold by a “motivated” seller.
The motivation, no doubt, has roots in a 2003 scandal in which some of Putnam’s portfolio managers and investors were allowed to “market time” its funds. Putnam subsequently agreed with the U.S. Securities and Exchange Commission and the Office of the Secretary of the Commonwealth of Massachusetts to pay US$110 million in penalties and restitution to settle charges with regulators.
Putnam has subsequently done its best to distance itself from the scandal by changing much of its management team. Ed Haldeman replaced Lawrence Lasser as CEO, and new people were moved into the positions of chief administrative officer, chief operating officer, chief financial officer, general counsel and compliance officer.
Net mutual fund redemptions — amounting to US$63 billion in 2003 — have since been whittled down, declining to US$21 million in 2006.
McFeetors says those issues are now history: “You’re always concerned when a company has problems, but the problems have been managed and are receding into the past. We’re looking forward. It’s a function of management, strategy and execution. How well you manage problems determines how successful you’ll be.”
Demmer says Putnam was significantly hurt by both the financial penalties it had to pay and the negative publicity, all of which was a result of the actions of a few individuals at the firm.
“In an industry in which companies rely on reputation and integrity, that’s never a good thing. I’m sure it was a factor in the decision to sell the business,” he says. “Putnam has always been a fundamentally good firm with a good track record. The business fundamentals have always been good. This is a chance to regain whatever was lost because of the mutual fund scandals.”
While most of the focus has been on Putnam’s U.S. operations, McFeetors is also optimistic about opportunities in the company’s offices in Germany and Japan.
“Our people in Germany and their people are already talking to one another,” he says. “Our partner in Japan is Nippon Life, the largest life insurer in the country. We hope some interesting things will come out of that in the future.” IE
Great-West Lifeco leaps into U.S. mutual funds
The purchase of Putnam Investments makes GWL an overnight powerhouse in the US$7.2-trillion funds market
- By: Geoff Kirbyson
- March 5, 2007 March 5, 2007
- 11:15