DBRS Morningstar Comments on Great-West Lifeco Inc.’s Intention to Sell Putnam Investments to Franklin Templeton

DBRS Limited (DBRS Morningstar) notes that Great-West Lifeco Inc.’s (Great-West or the Company) intention to sell Putnam Investments (Putnam) to Franklin Resources Inc. (Franklin Templeton) has no impact on the Company’s ratings, including its Issuer Rating of A (high) with a Stable trend. While Putnam is being sold at a loss relative to the purchase price, DBRS Morningstar views positively the alignment of the transaction with the Company’s strategic direction in the U.S., which includes a focus on the retirement and personal wealth space, where it has built up considerable scale through its ownership of Empower Retirement.

Great-West is selling Putnam for a total upfront consideration of $950 million to $1 billion (of which $850 million to $900 million will be in the form of Franklin Templeton shares at closing and $100 million in cash six months after closing) and future contingent consideration of up to $375 million, depending on whether certain revenue metrics are met, payable in years 3 to 7 following closing. The transaction is expected to close in Q4 2023, subject to regulatory and other customary conditions. Great-West will hold an approximate 4.9% interest in Franklin Templeton on a longer-term basis. PanAgora Asset Management (PanAgora) will not be included in the transaction and will continue to be owned by Great-West.

Additionally, as part of the transaction, Great-West will allocate $25 billion of assets under management (AUM) from its U.S. general account (which is largely managed internally and is used to back insurance product liabilities) to Franklin Templeton to manage. Franklin Templeton will primarily manage investment-grade fixed income assets, acting in a sub-advisory role to Great-West, which will continue to set the investment mandate and strategy. The outsourced funds comprise a small portion of the Company’s total general account assets.

The transaction is not expected to materially impact Great-West’s financial metrics in the near term, in part due to the Company receiving the majority of the purchase price through Franklin Templeton shares rather than cash. The Company’s earnings will benefit incrementally through dividends received from the shares. Great-West’s U.S. regulatory capital ratio is also expected to improve as a result of the increased holdings of shares that will be received as part of the transaction.

Despite good investment performance, Putnam has generally operated at either a loss or break-even as it did not have the necessary scale to effectively compete in the U.S. asset management market. The active asset management space has increasingly come under pressure since the purchase of Putnam in 2007, challenged in part by the movement towards passively managed and/or lower cost funds. Following the transaction, the Company’s U.S. businesses will be almost entirely in the retirement and wealth management space, with the exception of PanAgora, a quantitative asset manager with approximately $33 billion in AUM.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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