Franklin Resources: Distribution Deal With Great-West Could Be More Valuable to Franklin Than Putnam

While we had expected to lower our fair value estimate for narrow-moat-rated Franklin Resources BEN following the firm’s announcement that it was acquiring Putnam Investments from Canadian life insurer Great-West Lifeco for $925 million (composed of 33.3 million shares of its common stock when the deal closes and another $100 million in cash six months after the transaction closes), as well as potentially $375 million more in cash between three to seven years after the deal is consummated if certain growth targets are met, there was relatively little change to our valuation once we input all the specifics of, as well as the potential benefits from, the transaction into our model.

We’ve been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale within existing product sets, as well as pursue nonaffected investment products like alternative assets, as a means of offsetting the impact of fee and margin compression being driven by the growth of low-cost passively managed products. Following the firm’s purchase of Legg Mason in February 2020, Franklin has been focused more exclusively on alternative asset managers, so we were surprised to see the firm move for Putnam, a traditional asset manager that was far from a prized asset.

That said, we view this deal as being less about acquiring more traditional assets (although Franklin is expected to gain at least $130 billion in assets under management, or AUM, as part of the transaction) than about establishing a distribution relationship with Great-West and its parent company, Powers Corporation of Canada, to expand the reach of Franklin’s products in the wealth, insurance, and retirement channels. The company expects to offset the dilution to existing shareholders, as well as make good on the cash that gets laid out, by getting the profitability of the Putnam business more on par with its own and boosting its own organic AUM growth through the distribution partnership.