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Power kicking Putnam tires

Interest suggests Desmarais conglomerate eyes expansion into U.S. mutual funds

Power Financial Corp. is among the companies stalking Putnam Investments, a sign the conglomerate controlled by the Desmarais family is contemplating expansion into U.S. mutual funds.

Montreal-based Power Financial is one of several companies kicking tires at Putnam, a troubled U.S. fund manager formally put up for sale last month, according to investment banking sources familiar with the sale process.

A Power Financial spokesman would not comment.

Power Financial, through its Great-West Lifeco Inc. subsidiary, is already a major player in the U.S. insurance sector. But its dominant position in domestic mutual funds, as owner of IGM Financial Inc., stops at the border. IGM is the parent of Canadian fund giants Investors Group Inc. and Mackenzie Financial Corp.

Boston-based Putnam is expected to fetch at least $3-billion (U.S.). Analysts say several large U.S. money managers, including Franklin Resources Inc. of San Mateo, Calif., and Wells Fargo & Co. of San Francisco are contemplating offers for the company.

"Power has typically bought good companies, and made them better. It would be something of a departure for them to take on a turnaround like Putnam," said one investment banker who has worked for Power Financial on several deals. "Power doesn't enjoy the synergies that a U.S. mutual fund company would enjoy with Putnam, so I doubt they will win a hotly contested auction."

Putnam now takes care of $180-billion in assets for clients, down from a peak of $422-billion just six years ago. It has been rocked by a series of scandals and poor performance at flagship funds. Its parent company, Marsh & McLennan Cos., which has faced scandals and shareholder unrest of its own, announced Putnam was for sale in September, with two investment banks running an auction that's expected to conclude by year-end.

Power Financial, run by former investment banker Jeffrey Orr, has shown it can integrate large acquisitions. The company has done a string of successful takeovers in the past decade, acquiring London Life Insurance Co. in 1997 for $2.95-billion (Canadian), Mackenzie Financial in 2001 for $4.1-billion and Canada Life Assurance Co. in 2003 for $7.2-billion.

In each case, the Montreal-based company trumped rival bidders, so the prospect of a Putnam bidding war is unlikely to be a deterrent. But the other targets were healthy companies. Putnam, in contrast, has been bleeding assets for 63 consecutive months. One investment banker said: "Buying Putnam means grabbing a falling knife."

Insurance holdings account for 69 per cent of Power Financial's net asset value, while mutual fund companies are one-third of assets, according to a recent report by Scotia Capital Inc. analyst Kevin Choquette.

He said the conglomerate, whose market capitalization is $11-billion, has plenty of financial firepower, with a projected $613-million in cash and just $400-million of long-term debt at the end of 2006.

© 2007 The Globe and Mail. All rights reserved.

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