Great-West Eyes More Deals After JPMorgan Buy: Corporate Canada

Jul 03, 2014 10:05 am ET

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July 3 (Bloomberg) -- Great-West Lifeco Inc., one of Canada’s cheapest stocks, is hunting for more acquisitions to expand its money-management business in the U.S. and Europe.

Great-West, Canada’s second-biggest insurer with more than C$806 billion ($756 billion) in assets under administration, wants to increase its footprint in a U.S. market where retirement assets topped $23 trillion as of March 31. The company that bought a pension record-keeping business from JPMorgan Chase & Co. in April is now targeting similar operations in the U.S. and Europe.

“We’re looking towards acquisition opportunities -- the pension space and asset management space are areas where we’re interested,” Paul Mahon, 50, chief executive officer of the Winnipeg, Manitoba-based insurer, said in an interview at Bloomberg’s Toronto office last week. “There’s the broadest set of opportunities in the U.S. There would be a broad but a lesser set in the U.K.”

Great-West is seeking to add money-management businesses while trying to turn around Putnam Investments LLC, its U.S. asset management unit.

Great-West is seeking to buy firms or their assets that would make it a bigger player in pension management, capitalizing on fee income from the baby boomer generation that’s looking to earn returns for retirement. Mahon declined to cite a specific acquisition target or an ideal target value.

JPMorgan Addition

Great-West has already started its expansion. The company bought the large-market 401(k) record-keeping business from JPMorgan, making the life insurer the second-largest record keeper of those retirement plans by participants, with 6.8 million workers who have $387 billion in assets.

“Going after retirement assets makes sense because it plays into Great-West’s strengths and it’s not capital intensive,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Ltd. in Toronto. His firm manages about C$4.7 billion, including Great-West shares.

Administrators of 401(k)s are paid for their record-keeping service and may also make money from investments in the plan.

“The less capital you have to devote to that line of business, the more acquisitions you can make and it’s also less risky to shareholders,” Nakamoto said. “It also means a greater chance of a dividend increase.”

Great-West, majority owned by the billionaire Desmarais family through their Montreal-based Power Corp. of Canada holding company, offers asset management services through Putnam Investments and retirement and insurance products and services through Great-West Financial in the U.S. In Europe, it provides products and services in the U.K., Germany, and Isle of Man through its Canada Life subsidiary and in Ireland through Irish Life.

Unit Losses

Putnam, its Boston-based wealth-management business, has been losing money. By the first quarter of 2010, Putnam broke even following six straight quarters of losses. Putnam has had only two quarters of profit since then. The unit’s losses widened to C$53 million in the first quarter this year from C$14 million over the same period in 2013, according to company financial documents.

Mahon said Putnam represents “a significant future opportunity for us. It’s just a question of timing -- when the buildup of the asset base and the associated fees will outweigh the cost of that.”

“We have the right trajectory now,” Mahon said. “My expectation is that Putnam will be a significant contributer when I look to our organization five years from now.”

Rising Assets

Putnam’s sales rose 23 percent to $9.1 billion for the first quarter of 2014, driven by mutual fund sales. Assets advanced 14 percent to $153.4 billion in the quarter from $134.7 billion a year ago.

“It has been growing its assets under management -- the problem is that it’s not translating into bottom line profitability,” said John Aiken, Toronto-based analyst at Barclays Plc, who rates the stock a buy. “We’ve seen this story many times before: Great-West stating that they need asset growth to become profitable. That has not borne fruit for Great- West and for investors in this stage of the game.”

Great-West has declined 7 percent this year, compared with a 4 percent gain for Manulife Financial Corp., the country’s largest life insurer, and a 6.8 percent rise for third-largest, Sun Life Financial Inc. Great-West is the cheapest Canadian stock among 500 of the largest companies around the world, according to Bloomberg data, as investors and analysts discount Putnam.

The shares rose 0.4 percent to C$30.46 in Toronto at 9:41 a.m.

Putnam Marketing

Great-West acquired Putnam in 2007 from Marsh & McLennan Cos. At the time Putnam was “one of the worst-performing fund companies in the U.S.,” according to Mahon. Great-West went into “rebuild mode” to build up assets and clients, Mahon said.

Today, the life insurer is trying to turn a profit at Putnam by hiring and retaining advisers and “investing heavily” in marketing to reach more clients, Mahon said. It sponsored professional golfers Keegan Bradley and Brendan Steele, betting on them to win tournaments and showcase the brand. The fund is also active on social media, Mahon said.

Through acquisitions and positioning Putnam for gains, the U.S. region will contribute more to Great-West’s revenue in five years than it does today, Mahon said.

Last year, Canada made up about 48 percent of the firm’s revenue, Bloomberg data show. It relied on Europe for 32 percent and the U.S. added 20 percent. It’s a reversal from 2008, when the company was still integrating Putnam and the U.S. made up 12 percent of revenue and Canadian operations contributed about a quarter, with Europe making up more than half.