Welcome to Franklin Resources conference call. Hello, my name is Sylvie, and I will be your call operator today. As a reminder, this conference is being recorded, and at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.
Good morning, welcome to Franklin Templeton's conference call to discuss the establishment of a long-term strategic relationship with Power Corporation of Canada and Great-West Lifeco, and Franklin Templeton's acquisition of Putnam Investments, which is at the foundation of the partnership. Statements made in this conference call regarding Franklin Resources, Power Corporation of Canada, Great-West Lifeco Inc., and Putnam Investments, which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of today's date and involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements.
These and other risks, uncertainties, and other important factors are described in more detail in Franklin's press release distributed this morning at 7:30 A.M. Eastern Time and in Power Corporation of Canada's and Great-West Lifeco Inc.'s recent filings, which are available for viewing at www.sedar.com, and in Franklin Resources' recent filings with the Securities and Exchange Commission, including its most recent Form 10-K and 10-Q filings. None of the companies undertake any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law. Now, I would like to turn the call over to our President and Chief Executive Officer, Jenny Johnson.
Thanks, Selene, Good morning, everyone. Joining me for today's call are Matthew Nicholls, our Chief Financial Officer and Chief Operating Officer, Adam Spector, our Head of Global Distribution, and Terrence Murphy, our Head of Public Markets. Today, we are excited to announce our strategic partnership with Power Corporation and Great-West Lifeco. The Power Group of companies, including Great-West and IGM Financial, are leaders in the global insurance, retirement, asset management, and wealth management sectors and have collective assets under management and/or administration of approximately $2.1 trillion. Our partnership with Power and Great-West will be multifaceted. Great-West will provide an initial allocation of an incremental $25 billion in AUM to Franklin Templeton, This amount is expected to grow meaningfully over time. As another foundation of the partnership, Franklin Templeton will acquire Putnam Investments from Great-West.
Putnam is a $136 billion global asset manager, which has outstanding long-term investment performance and complementary investment capabilities and will strengthen our presence in the insurance and retirement sectors in particular. A key component of the partnership is that Great-West will become a long-term shareholder of Franklin Resources. We are delighted that Franklin Templeton will be partnering with Power and Great-West and would like to extend a warm welcome to the outstanding team at Putnam. Over the past few years, one of our strategic priorities has been to increase the diversification of our business and increase our relevance in certain key segments of the industry. We have been focused on expanding our investment capabilities, investment vehicles, and client segments across geographies to respond to market changes and client demand.
While we are always focused on organic priorities, we have stated our interest in distribution-led strategic transactions that would further diversify our business and accelerate growth in key markets. This partnership with Power and Great-West exemplifies this and, most importantly, accomplishes our objective of offering more choice to more clients in important sectors and delivering better outcomes for our clients. Specifically, Power is a global partner that shares a consistent business philosophy of being long-term-oriented investors with a client-centric culture and a core belief in active management. The Power Group of companies holds controlling interests in Great-West, which includes Empower in the U.S., as well as Canada Life and Irish Life across Canada and Europe, and IGM Financial, which encompasses subsidiaries Mackenzie Financial and IG Wealth Management. IGM also has investments in Rockefeller Capital Management and China Asset Management Company.
Power's leading positions give us access to greater diversity and connectivity in client markets that offer attractive growth potential. Progress such as this enables us to further invest across our business to the benefit of our overall firm and client base. As a partner to Power, Franklin Templeton is a leading global asset management firm with $1.4 trillion in AUM across a broad range of investment and distribution capabilities. Franklin Templeton's diverse specialist investment managers and wealth management business are complementary to the Power Group of companies, and we are excited about the numerous opportunities to collaborate on a global scale. Our acquisition of Putnam adds a global asset management firm that has outstanding long-term investment performance and brings complementary styles of investing to our existing capabilities.
Having spent extensive time with the Putnam team, we believe that our two organizations are strongly aligned in terms of culture. Matt and I would now like to take you through the specifics of the transactions. You will find the investor presentation posted on the Investor Relations section of franklinresources.com. Turning first to the strategic partnership with Power and Great-West. As parts of its diversification strategy, Great-West, the sixth largest insurer in North America, will allocate initial $25 billion of AUM to Franklin Templeton's specialist investment managers within 12 months of the closing of the acquisition. This initial commitment expands our existing relationship with an important client and aligns with Franklin Templeton's strategic focus.
We expect additional AUM to be contributed over the next several years from across the Power Group of companies. As we pursue opportunities, we have identified by matching our capabilities with their clients' needs. Now let's turn to Putnam. As mentioned, Putnam is a global asset manager with $136 billion in AUM as of April 2023, and brings complementary investment capabilities with strong investment performance. Greater than 80% of mutual fund assets are in four and five star rated funds, Putnam was recently recognized in Barron's Best Fund Families 2022 for strong performance over the one-, five-, and 10-year periods in particular. Importantly for us, as I have said, Putnam accelerates Franklin Templeton's growth in the retirement and insurance markets. With a strong target date fund offering and highly regarded stable value investment capability, Putnam increases Franklin Templeton's defined contribution AUM to $90 billion.
Retirement is an attractive channel known for its stable and growing assets, and U.S corporate DC assets are expected to grow to over $12 trillion by 2027. Putnam will also expand Franklin Templeton's insurance-related assets under management to approximately $150 billion. The insurance segment is a multi-trillion dollar asset base and strategically important to both the traditional and alternative asset management industry. The addition of Putnam will increase our overall AUM to $1.56 trillion and retail assets to $774 billion, excluding the incremental Great-West commitment. Putnam will add further scale and potential for additional efficiencies within Franklin Templeton's mutual fund platform and will facilitate the potential to reposition subscale funds across the combined fund range.
Franklin Templeton has a history of successful asset management acquisitions. We understand the complexity involved in executing a smooth transition to and through closing. We spent extensive time with the key leadership and investment teams of Putnam. As we have done with prior transactions, we have an execution plan that is focused on continuity, stability, and minimizing disruption in investment teams, client relationships, and client service. Now, I'd like to turn it over to Matt to discuss the specifics of the transaction.
Thank you, Jenny. Amongst other factors, this transaction is structured to maintain Franklin Templeton's financial flexibility and promote our continuing investments in the business. It also protects our strong financial position in the event of continued challenging market conditions. As mentioned, Great-West will become a long-term strategic shareholder, and in this context, Franklin Resources, Inc. will issue 33.3 million shares in upfront consideration at closing, plus $100 million in cash 180 days after closing for 100% of Putnam. At yesterday's closing stock price, this totals $925 million in combined consideration. Of the shares issued to Great-West, 26.2 million shares, representing 4.9% ownership, are subject to a five-year lockup, and the remaining 7.1 million shares, representing 1.3% ownership, are subject to a 180-day lockup.
Franklin Templeton will also pay up to $375 million in contingent consideration, structured from year three to year seven and tied to meaningful revenue growth targets from the strategic partnership. To receive the maximum consideration payable, revenues from the strategic partnership would need to grow to the equivalent of over 30% of Putnam's current annual revenue. From a tax perspective, the transaction is structured to allow Franklin Templeton to step up the tax basis of the acquired asset and create cash tax benefits valued in excess of $100 million on a net present value basis. Turning to the pro forma financial impact, the acquisition of Putnam is expected to add total run rate adjusted operating income of approximately $150 million after the first year post-closing, consistent with an approximate 30% operating margin, inclusive of cost synergies.
We currently anticipate $55 million-$75 million of non-recurring integration charges. The transaction is expected to be modestly accretive to adjusted EPS by the end of the first year after closing, including cost synergies. Any incremental share repurchases beyond employee share grant hedges would accelerate this timeline. Given how we have structured this transaction, our balance sheet will continue to be strong, with cash and investments projected to remain at approximately current levels of $6.5 billion, with no issuance of new debt associated with the transaction. As mentioned, this maintains our financial flexibility and our capacity to continue pursuing other growth initiatives. We anticipate closing the transaction in the fourth quarter of 2023, subject to customary closing conditions. In closing, we believe this transaction represents a mutually beneficial long-term partnership.
It also achieves Franklin Templeton's goal to deliver an even broader range of investment strategies to our clients and accelerates our growth in attractive retirement and insurance markets. We are thrilled to partner with Power and its group of companies, which share our focus on delivering strong investment results to our clients and complements our other key relationships. Before turning this over for questions, Jenny and I would like to thank the leaders of the Power Group of companies, Great-West, and Putnam, for their positive engagement with us over the last several months. Now we would like to open the call up to your questions. Operator?
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. We request that you limit to one initial question and one follow-up. Please go ahead and press star one now if you do have any questions. Your first question will be from Ken Worthington at J.P. Morgan. Please go ahead.
Hi. Good morning. Thanks for taking the questions. Maybe first, as you think about the benefits of the transaction, how much of the benefits for Franklin are being driven by a close relationship with Power Group and Great-West, and how much might be associated with directly owning Putnam? Ultimately, for this deal to work, you know, for the best result for Franklin, how important is it for Power Group to be a good partner, and are the incentives strong enough to drive this best result?
Look, you know, it's both. It's I don't think this deal would get done without the distribution capability and without the fact that Putnam is an amazing investment franchise. You got four and five star funds and 80% of their assets and funds. You know, we're excited about the capabilities it brings, but we're also excited about the relationship with Power. From an alignment standpoint, I mean, Power is primarily paid in Franklin stock and are long-term holders of it. We think they're gonna be fantastic strategic partners and holders of our stock. We've already discussed governance, a governance framework for ensuring that the partnership is, you know, we're thinking about it long term.
I would say that it is both the asset of Putnam as well as the relationships that we get with, you know, the retirement platform like Empower, Great-West from the insurance side, as well as the wealth management capabilities that they have, including even a closer relationship with, say, a Rockefeller, which, you know, they own 20% of, and just allows us a, you know, a seat at the table to be able to, you know, talk about the great capabilities that we have.
Just to add, Ken-
Thank you.
Ken, I would just add that if you look at the strategic priorities as outlined by Power and Great-West Life, it became quite clear to us that, you know, they have this tremendous focus on growing, wealth, insurance, retirement collectively, and have a history of doing that over the past, you know, many years, both organically and inorganically. That's point number one. Point number two, as Jenny alluded to, the connections between, Putnam and Great-West Life and other parts of the Power Group of companies is pretty embedded. They have a very strong long-term relationship. They haven't just owned Putnam for a few years. They've owned Putnam for a very long time, and the relationships are very deep and strong across those organizations.
Okay, thank you. Following up, wanted to dig further into Empower. Can you talk about how you see specifically the relationship between Empower and Franklin developing? Maybe how big is Franklin on the Empower platform today, and to what extent does the transaction enable the potential for Franklin to have a bigger or much bigger footprint on the record keeper over time?
I mean, I think, I think when we looked at it, Franklin's ranked like 14th largest asset manager on Empower. As you can imagine, just getting up to our market share would be significant. So we think it's a great opportunity, and the fact that Putnam has really high-performing, stable value and target date funds, which are great ways to get into any plans platform, is gonna be really important. About 29%, I think, of Putnam's assets are in the D.C. space. You know, we hope that that connection and that relationship allows Franklin to move up significantly from number 14.
Thank you very much.
Thank you. Next question will be from Brennan Hawken at UBS. Please go ahead.
Thank you, good morning. This is Adam Beatty in for Brennan. Just want to ask a little bit more about the wealth management channel. First of all, it looks like you have Rockefeller sized in the deck there, maybe not IG Wealth Management. Just trying to get a handle on the order of magnitude there. You know, further, I guess, to Ken's question about Empower, just how you're planning to use some of the new products as well as Franklin's existing capabilities to go after the wealth channel. Thank you.
I think, IG Wealth Management they've got about, $86 billion in assets under.
Just in wealth.
Just in wealth.
Yeah, $256 billion overall.
Yeah.
Okay.
Thanks. If that answers your question, what was your other question?
Yes, just in terms of the strategy and how you're planning to use Franklin's maybe existing capabilities as well as what Putnam obviously brings to go after the wealth channel. Thanks.
Yeah, I mean, you know, one of the challenges I think that Power's had with Putnam, and here you have this unbelievably performing investment capabilities, but the challenge has been on the distribution side, is distributors are reducing the number of partners that they have. It works both ways, right? We can bring Putnam to some of the bigger platforms that they may have been subscale. Also on the Power side, it allows us to sit down and, you know, Putnam already has relationships with many of these Power Corporation investments. We now are having conversations around our capabilities as well as we'll be able to, you know, ETFs and SMAs. It just opens up the conversation.
Again, as I mentioned, the framework around the two companies, we have, you know, built out a framework around working together to ensure we understand the priorities at a place like Empower, the priorities at IGM. You know, the being able to, you know, be at the table when they're thinking about what product development they want and what the opportunities. I don't know if, Adam, you want to add anything?
Yeah, I would just say that to me, what's most exciting about this is that the product sets are complementary, and that's really valuable. Where we have our strongest relationships in the wealth channel, Adam, I think that was your question, we have complementary strength and distribution. Bringing the two product sets together with one distribution platform where the legacy firms have different strengths, is better for both organizations.
That's got it. Very helpful. Appreciate those figures also. Thank you.
Thank you. Next question will be from Michael Cyprys at Morgan Stanley. Please go ahead.
Good morning, thanks for taking the question. Wanted to circle back to the $25 billion of flows that you're expecting to get within the first $25 billion within the first 12 months. What sort of strategies is that expected to be allocated into? What sort of fee rate can we expect on those? Are those likely to be more of the higher fee alternatives with 50 basis point type fee rates or higher, or is that more of like a core fixed income allocation that's more single digits? Maybe you could speak to how you expect that $25 billion to grow over time in terms of incremental flows. How meaningful could that be, and what's going to drive that? Thank you.
For the first $25 billion, about two thirds of that is likely to be in core plus, investment grade, fixed income type assets under management. That's lower fee, insurance-related, general account, you know, classic, fixed income business. The effective fee rate as a whole, though, is something like mid-teens basis points. It does include a portion of allocation into two or even three of our specialist investment managers that are in the alternative asset space. That brings the effective fee rate up. In terms of the future, you know, $25 billion is a very promising starting point for the strategic relationship, but the potential to expand beyond that is quite considerable given the breadth of our capabilities and the needs and the growth on the Power Group of companies' side.
As Jenny mentioned, we worked extensively on a bottoms-up analysis, in terms of, you know, the, the matching of what we can do at Franklin across all of our strategies, alternatives and traditional, combined, with the needs on their side.
Great. Just a follow-up question, could you speak to the organic growth trajectory at Putnam over the last three years? How many of those years, if any, were positive, what that flow picture looks like, and maybe you could speak to where they've had some strength versus some challenges on the flow side, and some of the steps that you might be able to do to help accelerate their organic growth? Thank you.
Yeah, as you can imagine, we dug deeply into this area. You know, they had positive flows in 19 and 20. Their more recent challenges and outflows in 21, 22 was really concentrated in their ultra-short duration, short duration, kind of mortgage areas. Honestly, same places we've had some challenges, primarily because people have invested in those as safe fixed income products, and with the rate, the pace of the Fed rate increases, a lot of people moved that money into money market funds. You know, we think as rates stabilize, it is quite likely that they'll be back into positive flows.
Great. Thank you.
Thank you. Next question will be from Alex Blostein at Goldman Sachs. Please go ahead.
Hey, all, Luke Bianculli on for Alex. Thanks for taking my questions. I was hoping we could start off, just to make sure I'm reading this right, the $150 million in operating income by the end of the first year after closing. If the deal closes at the end of calendar year 2023, does this mean $150 million in calendar 2024 or 2025? Can you just walk through how much revenue growth and margin expansion you're building into, building into projections? Thanks.
From a timing perspective, when we say end of the first year, we mean the beginning of our fiscal 2025. That'll be through 20, because obviously we got September year end, so we're talking about next September. Going into October 2024, so fourth calendar quarter next year, we would expect to be on a run rate level at least at $150 million. In terms of margin, our objective is to make sure that the Putnam business is at least at the same multiple, sorry, the same margin as Franklin, which is 30%. Obviously there is some upside to that, but we're very carefully managing the process of execution, and we feel comfortable with the 150 and the timing and the sequencing around that.
In terms of how we will achieve that, just one step further on the question is, we expect to phase in 25% of the cost savings, in the first quarter and the rest over the following four quarters, fairly linearly, I would say.
That's super helpful. Appreciate the detail. For my follow-up, I was hoping you could go through some protections on the purchase price. Do you guys have any qualifiers around the $100 million in cash or the $825 million stock issuance? Like, for example, is it subject to changes in AUM or projected revenue between now and the time of the close? Thanks.
We have standard purchase adjustments which is all tied to client consents and things like this in the purchase agreement. They're very standard. We'd be very, very surprised if any of those purchase adjustments were triggered in any shape or form. Obviously, we have the protection in the transaction, embedded in the transaction by using our equity, which was, you know, a very deliberate strategic decision to do that. There is no additional protection on the $100 million. The only thing I'd say is that we do have a minimum asset management services agreement of revenue, which ties very closely to the preliminary $25 billion of assets under management.
When you look at those two things, we have a minimum amount of revenue that we'd expect, even if we did not, for some reason, like a big market move, for example, we didn't get the assets that we expect over time from the partnership. We do expect, you know, meaningful revenue to be coming in each year. It's a combination of those things. It's the fact we've done it in equity. We have standard provisions within the purchase agreement. We've got the sort of the minimum, let's call it, asset servicing agreement between us and the company.
Of course, we have the earn-out of $375 million, which in order to achieve the high end of that earn-out, the revenues need to grow. If you think about Putnam as a base of $500 million, that has to grow by at least 30%, a little bit more than 30% to reach that. We think we have reasonable protections in the transaction, in that regard. The way we look at the, where we're at in 12 months time, the multiple of this transaction would be lower than our multiple as a company, which is how we got comfortable, partly how we got comfortable with equity on top of all the strategic reasons that we've outlined.
Thank you.
Thank you. Next question will be from Daniel Fannon at Jefferies. Please go ahead.
Hi, thanks. Wanted to follow up just on the flow picture in the, in the commentary. Just, Jenny, on your comments, that implies that equity flows at Putnam have been positive over the last couple of years, so just want to clarify that. When I look at the slide that shows the channel mix of your two companies, they're quite similar. Adam, I was hoping you could maybe expand upon how your distribution platform in retail is different than theirs, and ultimately how you think you can accelerate and/or improve the growth trajectory.
I'll just start. Their equity flows have been strong, particularly in like non-US equities and their very large cap value equity. The areas that they've struggled have been in the multi-asset and the fixed income. Primarily concentrated in the fixed income in the categories that I spoke about earlier. Was there a question?
Yeah, I would say that while if you look at the overall channel mix, there's some similarities. When you dig below those numbers, there's differences. For instance, if you take a look at insurance, a lot of theirs is on the general account side, where we might be a little more VA heavy. In addition, the retail distributors that we have strength with are slightly different, and within that, there's a different product group. As an example, their large cap value is not only a stellar performer, but one of their better sellers as well, and we think that's a nice complement. We also have a significantly larger non-US distribution footprint, and think that that will be additive, their products will be additive to that lineup, and we'll be able to accelerate growth that way.
Finally, as Jenny mentioned earlier, their position with the Power Group of companies, including Empower, is a little superior to ours, and we think that will be additive to both companies.
I guess, one other point to make, there is a scale point to make here, and that's that, you know, our largest distributors expect more from us, in terms of relationships, and with the relationships that we have and the capacity that we provide and the type of strategic discussions we have with our customers means that, you know, we'll hopefully be able to provide more access to these high-performing strategies that Putnam runs.
Matthew, I would add to that our solutions business is a real area of growth, and the Putnam strategies will now be on our solutions platform, and that's yet another avenue for growth for those strategies.
Great, that's helpful. As a follow-up, Matthew, I was hoping you could the accretion to adjusted EPS. Accretive to what? Is that current consensus estimates for next year? I just want to clarify that. I think I missed the total cost savings number that you highlighted. You gave the percentage of when it'll be realized. What's the total cost savings you're expecting?
Yeah, EPS is to consensus. In terms of overall cost savings, it's fairly close to the operating income number I mentioned. Putnam currently is, you know, and obviously, there's a number of allocations. It's quite complicated. If you look at the publicly available financials, it's not necessarily a direct reflection of a standalone business, but, you know, I would consider it to be, you know, mildly profitable. What we're able to do through adding Putnam to our overall platform here is to create the scale that you need in this business to have the type of margin we're talking about. That's what we're going to be achieving. As I mentioned, we're confident that we'll achieve that within 12 months.
Just to clarify, that's $150 million, you're saying equivalent to the operating income?
Yes.
Great. Thank you.
Thank you. Next question will be from Mike Brown at KBW. Please go ahead.
Hi, thank you for doing this business update. I guess I just wanted to check in on just an update on how you're thinking about strategic M&A, you know, now going forward. Obviously, you just announced this transaction, but is this indicative of a more conducive market for M&A in the asset manager space? How is activity progressing here? Are you starting to see a bit more of a healthy pipeline or dialogues kind of improving? You know, I know you just announced a deal, so I hate to ask about the next one, but could you just give us an update on how you're thinking about what other strategic opportunities could come next as you look forward?
I'll start a bit on how we're thinking about it as a firm, and Matt's always got his finger on the pulse of the industry stuff, so I'll let him add there. I think we've been pretty consistent with the three areas of focus for us. Product capabilities and, you know, emphasizing historically in the alternative space, because we see that as a secular change, where more folks are allocating into the private markets. The only area that we really see that still is open for us that we'd be interested in acquiring is in the infrastructure space. Distribution capabilities.
We look at this as completing both distribution, not completing, but adding both distribution as well as product gaps, and that was the stable value in the target date or two in particular, but also large cap value. Then finally, the third area for us is if there were interesting local asset management. That's our M&A strategy. The nice thing about this deal is, by using our stock, we both ensure that the partnership of PowerCorp is aligned with Franklin Templeton, because they are a major holder of our stock, and also provides us with continued financial flexibility if we were to be interested in doing another deal. As I said, we've done a lot, the bar is higher.
You know, if the right opportunity came up that met, checked the box in any of those three areas, we still have the ability to move in it. Matt, anything you want to add.
I think, no, I think, Jenny, you answered it all. I, the only thing I'd add to it is, in terms of your question around just general strategic activity in the industry, you know, I'd say it's really strong, and I don't think that the, and the dialogue is strong and the flow of ideas are strong across the industry with many different partners. Both, as you know, we're very focused on alternative assets, but we've never taken our foot off the gas in terms of making sure we explore very deeply, you know, what else we can do with our traditional asset management space. Both are really important, but it's not just us.
You know, there's a lot of activity going on across the sector because, you know, the industry continues to evolve, and not in a very slow way. Our clients demand more from us in more places, and we want to make sure that we're relevant and a winner, you know, in the sector. That's really the overall perspective in terms of activity. I don't really see the complexity of the market conditions haven't really slowed any of that down. There's no such thing as finding a great thing in difficult markets for a lower price, for example, in particular in the alternative asset space. We're very busy in the areas that Jenny mentioned, and, you know, it's very hard to do these transactions.
You need to have sort of a bit of a corporate DNA and being able to successfully integrate and make them work. We think we can do more of it when, you know, when we need to and when the timing is right for us.
Okay, great. Thank you for the thoughts. I'll leave it there.
Thank you. This does conclude today's Q&A session, and I would like to hand the call back over to Jenny Johnson, Franklin's President and Chief Executive Officer, for final comments.
I'd like to thank you guys all for your interest and for all the questions today. We think this is a really compelling transaction for Franklin Templeton, and we're excited to welcome Putnam to Franklin Templeton, and are delighted to have Great-West as a long-term shareholder. We look forward to collaborating on numerous opportunities on a global scale with the Power Group of companies. Thank you, everybody, for your time today.
Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. You may now disconnect your lines.