Great-West Lifeco Inc. (GWO) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco conference call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead.

Thank you, Ariel, and good morning, everyone. Earlier today, we announced that Great-West Lifeco has entered into a definitive agreement to sell Putnam Investments to Franklin Templeton, one of the world's leading asset managers. This is an important transaction that is expected to create benefits for all parties. We appreciate you joining us on short notice to discuss this news and what it means for our company. With me on the call today is Garry MacNicholas, Executive Vice President and Chief Financial Officer of Great-West Lifeco; also joining us for the Q&A is Raman Srivastava, Chief Investment Officer, Great-West Lifeco. Garry and I will deliver brief formal remarks, and then we'll be pleased to take your questions. Bob Reynolds will not be joining us as he's with his team in Boston today. Before we begin, I'd like to draw your attention to Slide 2 for our cautionary notes regarding forward-looking information and non-IFRS financial measures. These notes apply to today's discussion and presentation materials. Also, please note that all financial information throughout the presentation is in U.S. dollars, unless otherwise indicated. Please turn to Slide 3. Great-West Lifeco has agreed to sell Putnam to Franklin Templeton, a leading asset manager with a broad range of investment and distribution capabilities. This combination is value-creating for our stakeholders. For Lifeco shareholders, it's financially attractive with potential transaction consideration and retained value of USD 1.7 billion to USD 1.8 billion. This aligns with our stated goal to unlock value through a combination that scales Putnam. For our Putnam team and customers, it will leverage and sustain Putnam's capabilities and strengths as part of a scale, diversified asset manager. In addition to the asset sale, Great-West Lifeco, Power Corporation of Canada and Franklin Templeton have entered into a strategic partnership. We look forward to leveraging Franklin Templeton's asset management strength in support of our wealth, retirement and insurance businesses across Lifeco. Beyond the transaction consideration and partnership benefits, Great-West Lifeco will retain its controlling interest in PanAgora Asset Management, a leading quantitative asset manager with USD 33 billion assets under management will realize the value of Putnam's seed capital and will retain certain tax benefits related to Putnam. Please turn to Slide 4. Putnam brings a lot to this transaction, strong investment performance and complementary capabilities to Franklin Templeton. With over 80% of mutual fund assets in 4-star and 5-star rated funds, Putnam's performance will help Franklin accelerate its growth, benefiting clients of both companies. The addition of Putnam's scale product and distribution capabilities will strengthen Franklin in a number of areas, including the retirement and defined contribution investment-only markets. I'm looking forward to seeing Putnam flourish as part of Franklin Templeton. With the combination delivering benefits for clients, teams and shareholders of both Great-West Lifeco and Franklin. With that, I'll now turn the call over to Garry to speak to the terms of the transaction and the components of value to be received by Great-West Lifeco. Garry?

Thank you, Paul. Please turn to Slide 5. The overall transaction and retained value for Great-West Lifeco is estimated at over USD 1.7 billion and is expected to be moderately accretive to Lifeco EPS. There are a number of components to the value highlighted on the left-hand side of the page that I'll walk through. For the Putnam operations, excluding seed capital and subsidiary, PanAgora, Franklin will pay Great-West Lifeco upfront consideration comprised of cash of $100 million plus stock consideration of 33.3 million Franklin shares. We have estimated the share value at $850 million to $900 million based on recent share price performance. Today's price is a little lower than the average over the last couple of months, reflecting market pressures in recent weeks, but we are looking at the value over a longer time horizon. The majority of Putnam seed capital is also being acquired by Franklin for cash and a portion is being retained with a combined value of $220 million, although this will also fluctuate. Lifeco is retaining PanAgora, a leading quantitative asset manager with a value of $180 million. In addition, there is future contingent consideration of up to $375 million based on the strategic partnership. The $375 million contingent payments would be payable in cash and based on achieving certain milestones in the growth of the partnership over the next 3 to 5 years with the potential for catch-up payments based on growth out to year 7. EPS accretion is a result of the assumed incremental investment earnings on the stock and cash consideration, including Franklin common share dividends. The transaction is expected to be broadly neutral to book value depending on the value of Franklin shares and other adjustments at close. Closing is expected in the fourth quarter of 2023, subject to regulatory approvals and other customary conditions. Putnam employees own 12.2% of Putnam and Great-West Lifeco will purchase their shares at closing and also share any future contingent payments as and when received. Lifeco will have a 5-year lockup on a portion of its Franklin equity stake equal to 4.9% of total Franklin shares outstanding, representing approximately 26.2 million of the 33.3 million shares. We plan to hold the shares within Empower's insurance companies as part of the asset supporting their RBC regulatory capital ratio. The transaction is to be treated as an asset acquisition for U.S. tax purposes, which enables Lifeco to retain certain tax benefits with a value of approximately $345 million. I will now turn the call back over to Paul to provide additional context about how this transaction furthers Great-West Lifeco's growth strategy.

Thanks, Garry. Please turn to Slide 6. This transaction generates immediate value for Great-West Lifeco shareholders, including seed capital recovery, cash proceeds as well as participation in Franklin Templeton dividends and potential share price appreciation. It also allows us to increase our focus on building and extending leadership positions in the U.S. retirement and personal wealth markets through Empower. Further on in this presentation, we've included a slide profiling how we've built Empower into a leader in the U.S. retirement market, with 18 million plan participants and USD 1.4 trillion in assets under administration. We believe in the value of strong asset management and the sale of Putnam to Franklin Templeton is about scaling and strengthening Putnam for the benefit of stakeholders. We are confident that the combined Franklin-Putnam organization will also provide Lifeco and our affiliates with access to scaled and diversified asset management solutions that will further enhance our wealth, retirement and insurance offerings. We will also continue to build on Great-West Lifeco's strength in asset management through our diverse general account capabilities, our ownership of investment managers such as PanAgora, ILIM and Setanta and through our growing number of strategic partnerships that include Franklin Templeton, Mackenzie, Northleaf and Sagard. I will now ask you to turn to Slide 7 for more detail about the strategic partnership. We believe the strategic partnership between our companies will benefit our clients, distribution partners and shareholders. Franklin's diverse specialist investment managers are complementary to both Lifeco and Power affiliate capabilities, providing significant opportunity to cooperate on a global scale. As noted on the slide, Lifeco will provide an initial long-term asset allocation of USD 25 billion to Franklin's specialist investment managers within 12 months of closing. Beyond this, we expect additional AUM allocations over the next several years as we leverage Franklin's diverse and competitive asset management solutions across Lifeco platforms. While these allocations will benefit our companies and clients, they will also benefit our shareholders as growth in the partnership will drive the contingent consideration. Please turn to Slide 8. Franklin Templeton is a great fit for Putnam, is one of the world's leading investment managers with a strong presence in traditional and alternative investments, operating more than 30 countries under multiple recognizable brands. This business model will allow Boston-based Putnam team and their investment solutions to flourish as part of an at-scale organization. Importantly, Franklin like Putnam is a long-term-oriented investor with a client-centric culture and a strong track record of M&A execution and integration, including several recent high-profile acquisitions. Please turn to Slide 9. As I shared with you a few moments ago, we believe this transaction is a great key next step in Great-West Lifeco's U.S. growth strategy. This slide highlights the steps we've taken to reposition our U.S. business through multiple transactions supported by investments in technology and talent. Like the scale Franklin Templeton brings to unlock Putnam's strength, we believe the scale we've built at Empower provides us with a platform for growth. Not highlighted on this slide is the significant opportunity we see to provide technology-enabled personal wealth advice, products and services to Empower's 18 million participants. This will be an area of focus at an upcoming Investor Day we scheduled for June 20. Please turn to Slide 10. To conclude, we believe we found the right partner in Franklin Templeton. The strategic partnership enhances value creation opportunities for Great-West Lifeco shareholders and clients, while positioning Franklin to build upon Putnam's complementary capabilities. The transaction unlocks the value of Putnam while focusing Lifeco's U.S. business on building and extending its leadership position in retirement and wealth management markets. It allows Great-West Lifeco shareholders to benefit from equity participation in a large and scaled global asset management platform, and it establishes a strategic partnership between Great-West Lifeco, Power Corporation and Franklin Templeton which is expected to generate meaningful value for all parties well into the future. Finally, and importantly, before we get into Q&A, I would like to thank Bob Reynolds for his continued leadership over the past 16 years. I would also like to thank the entire Putnam team for their commitment to excellence for their clients. During his tenure, Bob built an exceptional team. Together, they revitalized Putnam through strong sustained investment performance, disciplined expense management and the development and delivery of competitive and relevant solutions for clients and their advisers. Ultimately, this laid the foundation for Putnam to come together with Franklin Templeton for its next phase of growth. And with that, we'll now open to questions, operator. Thank you.

[Operator Instructions] Our first question comes from Meny Grauman of Scotiabank.

Just to start -- just a few questions on the components of values you laid them out. Just to clarify, the line item that deals with estimated seed capital, is that just Franklin buying out that seed capital stake or those seed capital stakes? I'm just trying to understand that line specifically. First question.

Okay, Garry?

Yes. The current value to the seed capital, Franklin is buying $165 million, and we are retaining $55 million. So it's $220 million which is the midpoint of that range. So that's what that line is getting at. And obviously, there can be other closing adjustments. So both the value and the closing will fluctuate at close.

Got it. And then for the contingent consideration, are you able to provide us a little more in terms of what is this tied to? Is it AUM growth? Anything else to kind of help scale what kind of upside the business needs to achieve before you get those payments?

I'll start out by -- I'm going to let Garry maybe provide a bit more detail, but I'll start off by just providing some insight that we've spent a lot of time looking at Franklin's capabilities, trying to understand where they're complementary. We've noted their significant growth and strength in alternative asset management and we look to that and we see significant opportunity for Franklin to be a partner in terms of supporting our general account, our wealth management solutions. So we see a lot of opportunity in that transaction. Ultimately, the value of the contingent consideration is going to be based on growth in the partnership. And we're not going to provide more details on that specifically other than that there's various thresholds over time. So Garry, do you want to speak to that?

Yes. I just -- I note -- there are -- the $375 million is divided into 3 payments in years 3, 4 and 5 of up to $125 million each, and then there's various catch-up mechanisms. And it's based on a revenue metric that is the growth in the partnership. That's the main metric.

But just to reiterate, we've done a lot of work to understand that, and we come into this with great confidence that we can drive strong revenue flow just because of the strengths and the complementary nature of their capabilities.

Got it. And then finally for me, just bigger picture, trying to understand from your perspective, the timing of this transaction, why you felt now was the right time. You highlighted valuations for asset managers, definitely are not at their peak right now. So why do this deal now?

Yes. Good question. Well, the reality is we've looked at a number of opportunities over time. And it's always come down to -- obviously, there's going to be the financial side of it, but there's going to be the fit side of it. And the reality is we take on Franklin's stock, the value to me is a bit secondary because if values are down now, ultimately, we believe values will grow and we'll be holding stock in an asset manager. The other point I'd make is it was critically important to us. We really think that Franklin is the best-fit partner that we've come across. We think it's good for the Putnam team. We think it's good for Putnam clients, and we think it's good for our overall company. So timing is one of those things. You can't select the time and the opportunities come when they come. But I think we are most focused on fit, and we're really excited about the fit of Putnam with Franklin and in the context of the partnership.

Our next question comes from Paul Holden of CIBC.

Similar to Meny, I have a number of questions just to make sure I understand the transaction details correctly. And I guess, starting with the payment to employees, assuming they get 12.2% of gross proceeds as it comes in? And I guess, where I need clarity is just like what does that include? What does it not include? Like, I'm assuming that does not include any proceeds for seed capital. But is there anything else that would be excluded in terms of those payments to employees?

Garry, over to you.

Yes. The employees get -- the 12.2% is for the -- for the -- actually the full Putnam. So that includes the seed capital. That's all part of Putnam. So I think there it's about -- what would that be somewhere in the $165 million range would be the 12.2%. So it is on the full value of Putnam. It does not include the tax benefits that are retained.

Got it. Okay. And then in terms of the roughly 7 million of Putnam shares not under the lockup once the deal closed, can those be sold at any time? Or is there sort of a -- [ standing with these ] deals, typically, there might be a 60-, 90-day type lockup like a shorter lockup period?

Yes. Well, there's an initial lockup period of 180 days, after which we could. But ultimately, we'll make that decision when that time comes. As we said, we like the ownership stake in Franklin. And so we'll cross that bridge when that time comes.

Understood. And then in terms of the cash proceeds, other than the payments that need to be made to employees. Is this going to be -- I don't know if there's a ton left over, is this mostly going to be about delevering similar to your current use of excess capital?

Garry, over to you.

Yes, yes. There's -- I'd point out a couple of things. One is that obviously, there is the cash and then there's the potential, depending on the shares in 6 months. But also I'd note that we are holding this under the U.S. insurance entities. The shares will be held there. They account for RBC capital. So that also frees up some potential RBC room. Now obviously, it's not liquid, but it is potential RBC room as well. And the use of the cash, yes, we certainly have a priority in the short term on continuing our deleveraging. And obviously, it could be deployed elsewhere as well beyond the deleveraging.

Okay. And are you able to quantify that RBC benefit?

It's -- yes. I mean it is a fairly complex calculation because of the way RBC works. But I would imagine it'd be a few hundred million of capital generated on top of the -- we have some requirements for holding it and then the excess generated to be in that $300 million, $400 million in that sort of range.

Okay. That's helpful. And then last one for me is just in terms of the $25 billion of long-term asset allocation to Franklin. Can you talk with any more specifics around what type of mandates, what the advisory fees might be on that? And I guess just really bigger picture, given the internal capabilities you have, why allocate $25 billion of assets to Franklin? What do they bring to the table that GWO can't manage internally?

Good question. I'm going to -- I'll turn it to Raman to provide a bit more detail. But as part of the transaction, we looked at this from the standpoint of both the economics, the organizational fit and -- but also the partnership opportunity because there really are a number of complementary capabilities that we think augment the strength that we have internally. Raman, maybe you can provide a little bit of context.

Yes, sure, Paul. And thanks for the question. So I'd say a couple of things. So one is, as you know, our U.S. business has grown significantly. And along with that, our assets have grown significantly, so the $25 billion principally will be -- a lot of it will be coming from the general accounts. And if you recall, our general account is high quality. It's mostly fixed income, investment-grade rate at 99%. So it's -- these assets, which are in scope, at least at first instance. And as Paul mentioned earlier, Franklin does provide a very broad platform for us to look at. They have capabilities in fixed income for sure, but they have capabilities in other areas which are complementary such as partially alternatives market. So we expect this to evolve over time. And initially, though, we think there's some path forward there in the general account.

Congrats on getting this transaction across the line.

Thanks, Paul.

Our next question comes from Gabriel Dechaine of National Bank Financial.

What's the -- so the tax loss carryforwards that you're retaining, what's the duration of those?

Garry?

Yes. The exact rate, I don't know the exact rate. I think we'd be using those up probably within the next 5 years or so.

Okay. Then cash component of the proceeds, I guess, you got the $100 million from the direct sale and $165 million in the -- from the seed capital sale in U.S. dollars is not a huge amount, but would it be safe to assume that's going to be directed towards deleveraging?

Garry?

Yes. Yes. That's -- I mean, obviously, it's [indiscernible] but certainly, deleveraging continues to be a priority. And then beyond that investments.

And I don't know if you answered it in the prior question, but the sub-advisory of that $25 billion, are there any cost savings because you'll be paying a sub-advisory fee presumably, but maybe some internal changes are possible to?

No. I would say broadly, it's sort of a breakeven. Really, what we're doing is we're just looking for the benefits of diversification. We're looking for the benefits of some of their alternative strengths, some of their global capabilities that we actually don't have in place. So it's really looking for things that are complementary in the same way that we've been able to leverage complementary capabilities with Sagard and with Northleaf. We really look for this to be complementary to the strength that Raman has on his team. Anything else you'd add, Ram -- Raman?

I think that's right. Thanks, you did well.

Okay. How long have you been working on this deal? I know -- I mean I have certainly asked the question over the years and others have, whether you buy something or sell something? Maybe you can give me a sense of when the decision was made to ultimately go to the sale route, and how long have you been negotiating with Ben Franklin there specifically? And were there other -- other points in time, had you -- had you engaged in discussions with other potential partners?

Yes. So thanks for the question. I'll go with your last question first, which was, yes, we have, over the years, looked at a number of opportunities. But as I said before, it's always been about strong fit as well as sort of the financial part of it. This particular transaction, I'm not going to tell you when we got into discussions, but obviously, we worked with them. We wanted to understand, in particular, there's the economic side of it, but we also want to understand the potential of this partnership and the potential fit. So we worked hard to understand their capabilities and ultimately, we came to a decision and concluded on this last night.

Okay. Well, I know you won't give me a specific time line there, but is it months, years? How long you've been talking to these...

Well, these things don't happen in weeks. I'll tell you that. It's always going to be a number of months. And like all transactions, it takes a lot of hard work and time and to really come to terms but also come to a decision. So we're really pleased with our decision.

All right. And I echo the congrats statement earlier.

Thank you very much, Gabe.

Our next question comes from Nigel D'Souza of Veritas Investment Research.

I have a couple of questions for you. First, just a point of clarification on the income and appreciation related to Franklin Templeton stock, is that going to be included in base earnings? Or were you referring to accretion on our reported EPS basis.

Garry?