DBRS Places Great-West Lifeco Ratings Under Review with Developing Implications

DBRS has today put the ratings of Great-West Lifeco Inc. (Lifeco or the Company), Power Financial Corporation, and Power Corporation of Canada Under Review with Developing Implications following the Company’s announcement that it has won the bidding for Putnam Investments Trust (Putnam), the asset management division of Marsh & McLennan Companies, Inc. Lifeco has made a cash offer of USD3.9 billion ($4.56 billion) which remains subject only to regulatory approvals and the approvals by the holders of Putnam mutual funds and Trustees who oversee these funds. Following the sale of Putnam’s 25% economic interest in T.H. Lee Partners to The Great-West Life Assurance Company for USD350 million and a planned monetization of certain deferred tax benefits in the amount of USD550 million, the net cost of Putnam’s mutual fund business will be just USD3 billion, which represents a relatively low cost by industry standards. The transaction is expected to close during the second quarter of 2007. Prior to closing, the Company will finalize its financing arrangements, which will drive the final ratings decisions.

The Company has indicated that the equity component of the financing will be no greater than $1.2 billion. The balance is expected to be funded by a mix of cash on hand, debt instruments, including bank loans or public debt, including hybrid securities. While this acquisition has obvious strategic benefits to the group, DBRS is mindful that the Company has not been given sufficient time to reduce its leverage in line with its own targets following the Canada Life integration.

Since Putnam is expected to remain a stand-alone indirect subsidiary of Lifeco, DBRS does not anticipate any integration complications.

Putnam currently has assets under management of over USD192 billion (as at December 31, 2006) including USD118 billion in U.S. retail mutual funds, USD35 billion in international funds, and USD39 billion in institutional funds. Assets under management are diversified across management styles and asset classes with over half of AUM invested in equities and the balance in fixed income. High exposure to the hi-tech meltdown, poor investment management performance, and a severe penalty related to the market timing scandal has resulted in Putnam’s AUM falling from over USD370 billion at the end of 2000. New management since 2003 has been focused on improving investment performance, and leveraging the Putnam brand, which is still highly regarded notwithstanding recent experience. While net sales continue to be negative, there is evidence that the rate of decline has decreased so that net cash inflow is about to turn positive. Increasing assets and more aggressive cost containment will be the key to bringing Putnam’s expense ratios in line with those of its competitors.

The acquisition is an opportunity to establish a meaningful presence in the U.S. fund management business which is complementary to Lifeco’s existing U.S. financial services business conducted through Great-West Life and Annuity Insurance Company. It is also consistent with Power Financial Corporation’s broader growth and diversification strategies. The acquisition is expected to be accretive to earnings in the first year with no assumed revenue or expense synergies. For its part, Putnam stands to benefit from the strong governance and oversight practiced by Power Financial Corporation with all of its subsidiaries.

Note:
All figures are in Canadian dollars unless otherwise noted.