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Power eyes U.S market with Putnam bid

Canadian mutual fund giant in running to buy troubled firm for $3.5-billion-plus

Power Financial Corp. is closing in on a $3.5-billion-plus (U.S.) purchase of Putnam Investments that would launch Canada's biggest mutual fund owner into the U.S. market.

Montreal-based Power made the final round of bidders for troubled Putnam, according to investment banking sources working with both the Canadian and U.S. companies. A subsidiary of insurance brokerage Marsh & McLennan Cos. Inc., Boston-based Putnam was put up for sale in September and Marsh chief executive officer Michael Cherkasky said last week that he plans to make a final decision on the sale by early in the new year.

"Power is working hard on a deal as a way to finally expand in the U.S., because they've run out of room in Canada," said one banker close to the company, which is controlled by the Desmarais family. Several sources said Power was rebuffed this fall when it offered to buy MFS Investment Management, a Boston-based unit of Sun Life Financial that is similar in size to Putnam. Sun Life opted to hang on to the division.

Putnam has assets of $187-billion and nationwide brand recognition, but has been hammered by heavy fund shareholder redemptions since being caught up in the 2003 market timing scandal. The outflow of assets stopped in October, when the firm reported net inflow to its funds for the first time in several years.

Other potential Putnam bidders are said to be Italian fund manager UniCredito Italiano SpA and Britain's Amvescap PLC, which owns Aim Trimark in Canada. At an investor conference last week, Mr. Cherkasky said Putnam had attracted "a high number of interested parties" and that a variety of options were under discussion.

One investment banker familiar with the Putnam auction said Power is at a disadvantage bidding against rivals with larger U.S. operations because the Canadian company can't realize the same potential cost savings, such as job cuts and back-office synergies. But Power is seen as a motivated strategic bidder.

Power controls Canada's largest mutual fund family through its stake in Winnipeg's IGM Financial Inc., parent of Investors Group and Mackenzie Financial Corp. It also owns one of North America's largest insurers, Great-West Lifeco Inc. Power is headed by Jeffrey Orr, former CEO of IGM Financial and investment dealer BMO Nesbitt Burns Inc.

Buying Putnam would mean accepting a degree of risk not typically seen in Power purchases. Mr. Orr and his team have a sterling record for acquisitions, but have traditionally bought quality companies and Putnam is seen as damaged goods. There has been speculation in the U.S. media that Marsh may have to accept some sort of earn-out arrangement with whoever buys Putnam,, with the final price contingent on performance.

Shouldering aside rivals to buy Putnam would be in step with Power's pattern in acquisitions, as the company has often emerged as a white knight in contested takeovers. Analysts say Power's three-year hiatus from acquisitions has built a strong balance sheet that could easily support the U.S. purchase, which is forecast to cost anywhere from $3.5-billion to $5-billion. That is well under the valuation Power paid for Mackenzie Financial.

Power outbid Royal Bank of Canada to acquire London Life Insurance Co. in 1997 for $2.95-billion (Canadian), snatched Mackenzie Financial from rival CI Fund Management in 2001 for $4.1-billion and bested Manulife Financial to win Canada Life Assurance Co. in 2003 for $7.2-billion. All of these takeovers are domestic, and in a recent report to investors, Power noted that it "sought to maintain a balance between Canadian and non-Canadian earnings."

Power executives have consistently declined to comment on Putnam or any other transaction they may be working on.

Putnam is one of New York-headquartered Marsh & McLennan's four major divisions. The others are its Marsh risk and insurance services, Kroll Inc. and its risk consulting and technology subsidiaries, and Mercer Human Resource Consulting. Last week, Kroll Security International Inc., Kroll's London-based security and protection subsidiary, was sold to Montreal-based Garda World Security Corp.

© 2007 The Globe and Mail. All rights reserved.

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