TORONTO/VANCOUVER, British Columbia (Reuters) - Canadian insurer Great-West Lifeco Inc. (GWO.TO) said on Thursday it will buy ailing money manager Putnam Investments from Marsh & McLennan Companies Inc. (MMC.N) for $3.9 billion in a bid to gain a key foothold in the U.S. asset management market.
Great-West Lifeco’s president and chief executive, Raymond McFeetors, told a conference call the deal would boost assets at the insurance unit of Montreal-based Power Financial Corp. (PWF.TO) to C$420 billion ($356 billion) from C$197 billion.
“The company has been reviewing for some time its strategic positioning in the U.S., particularly we have a desire to increase our presence in the asset accumulation and wealth management (market),” he said.
“We’re a top 10 player with this acquisition.”
Great-West, based in Winnipeg, Manitoba, expects the acquisition to add to its earnings, before restructuring charges, in the first year.
Both boards have approved the transaction, and they expect it to close in the middle of this year. Boston-based Putnam will keep its name and existing management, investment, distribution and service teams.
McFeetors said the buy was a “great opportunity” as Putnam had an implied price-to-earnings ratio of 14.5, including planned margin improvements, compared with an average multiple of 22 for asset managers.
Genuity Capital Markets analyst Mario Mendonca estimated that with Putnam’s current sub-par margins, it was bought for between 20 and 23 times earnings, in line with current market valuations.
If Putnam’s margins improve, the deal could boost Great-West’s 2008 earnings by up to 8 Canadian cents a share, Mendonca said in a research note.
The Canadian insurer is the latest domestic financial services company to look outside of Canada for future growth, and Putnam will give Great-West a significant U.S. distribution network and established brand, Desjardins Securities analyst Michael Goldberg said.
For Marsh, the sale followed longtime pressure from investors to shed the underperforming unit, one of its four major divisions. Marsh Chief Executive Michael Cherkasky told Reuters that he plans to use the net sale proceeds for acquisitions.
Putnam has suffered from rising redemptions and poor performance by its top funds, and some analysts doubted whether a deal would go through at all. Its assets are down to $192 billion from about $371 billion in 2000.
Assets started falling during the bear market of 2000-02 and despite the stock market recovery, the decline continued as Putnam was charged with fraud in an industry-wide market-timing scandal that hit in 2003. Putnam settled by agreeing to pay about $193 million in fines and restitution.
Putnam management say they have a plan that will return operating margins to industry norms, and McFeetors said he expects fund flows to turn positive this year.
At a news conference in Toronto, Putnam president and chief executive Charles Haldeman said total net fund outflows in the first half of 2006 were $12 billion, and that declined to $3 billion in the third quarter. He expected a “marked improvement” in the fourth quarter.
Great-West said it would finance the transaction with a combination of internal resources, an issue of common shares worth a maximum of C$1.2 billion, debentures and bank credit, and the securitization of a tax benefit of about $550 million.
In a separate statement, Power Financial Corp., which owns more than 70 percent of Great-West Lifeco, said the deal will satisfy its goal of expanding its U.S. financial group, and will add to Power Financial’s earnings in the first full year.
The $3.9 billion price for Putnam — which includes $350 million for Putnam’s 25 percent stake in private equity firm T.H. Lee Partners — was in line with recent press reports. Marsh & McLennan said in September that it was considering a sale.
Shares of Great-West Life rose 52 Canadian cents to C$35.01 on the Toronto Stock Exchange on Thursday. In New York, Marsh shares were up 46 cents at $29.96.
(Additional reporting by Dan Wilchins, Christopher Kaufman and Ed Leefeldt in New York, and Muralikumar Anantharaman in Boston)