Franklin Resources: Putnam Purchase Seems to Be More About Distribution Than Asset Management

We expect to lower our $26 fair value estimate for narrow-moat Franklin Resources BEN following the firm’s announcement that it is acquiring Putnam Investments from Canadian life insurer Great-West Lifeco for an estimated up-front consideration of $925 million, comprising 33.3 million of its shares at the deal’s close and $100 million in cash six months after the transaction. Franklin is also obligated to pay up to $375 million to Great-West anywhere between three and seven years after the deal is consummated, depending on the growth of a newly formed partnership between the U.S.-based asset manager and Great-West and its parent company, Power Corp. of Canada, to distribute Franklin’s products, especially in the wealth, insurance and retirement channels.

While Putnam was a prominent name in U.S. mutual funds in the 1990s, it fell on hard times in the early 2000s and was not considered a prized asset when Great-West acquired it in early 2007. Putnam has since been a source of heartburn for Great-West: In just the past five years, the asset manager lost $80 million in 2018, broke even in 2019 and 2020, became profitable in 2021, and returned to a net loss in 2022.

In our view, Franklin is betting that it can offset the dilution to existing shareholders, as well as make good on the cash it lays out, by getting the profitability of the Putnam business more on par with its own (which should be easy enough, as long as it folds in all of Putnam’s assets under management and eliminates redundancies in personnel) and generating meaningful amounts of growth from the Canadian partnership. We view Great-West’s commitment of an initial $25 billion to Franklin’s specialist investment managers within 12 months of the closing to be a good start. But we have to be conservative with our expectations, which is why we think this deal more likely than not will detract from our valuation.