(Bloomberg) -- The Desmarais family’s decision to sell Putnam Investments marks the end of a failed effort to turn around the fund manager, one that cost its Canadian owners well over $1 billion.
Great-West Lifeco Inc., which is controlled by the billionaire Montreal family, is selling Putnam after almost 16 years to Franklin Resources Inc. Franklin will pay an initial $925 million, mostly in shares.
Great-West is also eligible to receive contingent payments of as much as $375 million, tied to revenue growth targets, and will retain a small part of the business. The transaction puts a maximum value on Putnam of about $1.8 billion, Great-West said in a statement. That’s 40% below the approximately $3 billion it paid for the Boston-based asset manager in 2007.
The timing for that deal could hardly have been worse for the Desmarais clan, who built a multibillion-dollar financial-services empire over generations through shrewd acquisitions that consolidated the Canadian life insurance and asset management sectors.
Putnam, which had been losing clients after a mutual fund-market timing scandal, appeared to be an inexpensive play for growth in the US market. It had nearly $200 billion in assets under management when Great-West and its parent, Power Corp. of Canada, unveiled the takeover.
It’s smaller today. Franklin Templeton is acquiring funds with about $136 billion under management, while Great—West is retaining a small quantitative asset manager that has $33 billion.
“We struggled financially and economically to make a profit at it,” Power Chief Executive Officer Jeffrey Orr said in an interview. “Putnam had a great performance, but when the market is not purchasing active funds, it did not translate into positive flows. So we never got the revenues to go with all the investments we made.”
Read More: Franklin Templeton to Buy Putnam as Desmarais Family Exits
The 2007 deal also included a stake in Thomas H. Lee Partners and a tax asset, which took the announced value to $3.9 billion. Excluding those, Putnam’s investment management operations were worth $3 billion.
Great-West took a $1.3 billion after-tax charge in 2008, said its Financial Officer Garry MacNicholas. “We are divesting Putnam approximately at book value,” he said. “We’re selling and retaining amounts that are valued at $1.7 billion to $1.8 billion. So that’s how I think of the math.”
Great-West and Power, by acquiring a 6.2% stake in Franklin, could still make up some of their Putnam losses. But for that to happen, the San Mateo, California-based asset manager would have to reverse its own performance issues. Franklin shares are down more than 50% over the past 10 years, and fell 2.8% in New York on Wednesday.
“In hindsight, Putnam was an unambiguously subpar investment,” National Bank of Canada analyst Gabriel Dechaine said in a note to investors. “Yes, market conditions and mutual fund industry dynamics (and valuation) are different. However, from an operating standpoint Putnam was a consistent disappointment.”
But the analyst said Great-West is selling for a “fair price” and the deal eliminates the risk of the company making a large acquisition to bulk up Putnam.
(Updates with comments from Power Corp. CEO Jeffrey Orr, closing share price, additional analyst comment)
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