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Putnam deal reports welcomed by analysts

Analysts have broadly welcomed reports that Marsh & McLennan Companies (MMC) has agreed to sell subsidiary Putnam Investments to Power Corp of Canada for $3.9bn.

The Wall Street Journal report last week suggested a deal is likely to be announced early this year, pending approval from fund shareholders.

It added that the Montreal-based company, which has beaten off rival bids from AMVESCAP plc and UniCredito Italiano, would not make drastic changes to the investment company’s management or structure, making the deal more likely to pass regulatory hurdles.

MMC revealed in mid-September that it was mulling the sale of its Putnam Investments subsidiary at the same time it announced plans to cut a further 750 jobs.

September's announcement came as speculation continued to mount over the future strategy of the group, with suggestions that individual units, such as the London market arm of insurance broker Marsh Inc or the reinsurance broker Guy Carpenter, may be sold off as MMC refocuses its business.

The Putnam sale, if completed, could make MMC a more likely target for a leveraged buyout, with analysts at Bear Stearns suggesting it may make such a move “more attractive”.

Analysts added that the move would allow MMC to refocus on its core insurance business.

“We’re happy that a deal is being done,” said investment bank Stifel Nicolaus & Co in an analysts’ note.

“In our view, [MMC] has enough to keep busy in its flagship insurance-brokerage business without the additional distractions of improving Putnam’s reputation or performance,” it added.

Deutsche Bank echoed the view that a sale would be positive, with Putnam “nonstrategic to the company’s other businesses”.

Morgan Stanley analysts said that the reported price, while in line with its valuation of the asset manager, is “below the ‘bull case’ we think many investors were seeking’”.

“Fundamentally, we view the sale as value neutral for our sum of the parts fair value analysis and dilutive to earnings per share,” said stock analyst Marc Serafin.

But he added there could be trading upside as the “Putnam overhang” is removed.

“We think no deal would have been a disappointment to some shareholders and another setback for a management team in search of credibility,” he explained.

Serafin said MMC’s strategy for use of proceeds would be critical, noting that simply handing cash back to shareholders “seems sub-optimal after paying a big tax bill for the gain on sale and paying down debt”.

“We think a combination of [mergers and acquisition] and more active share repurchase, while still dilutive post sale, are now the optimal mix for the ‘bull case’ to emerge over time,” he suggested.

Putnam has suffered in recent years, with funds hit hard by the bear market of 2000-2002, and the unit targeted by New York attorney general Eliot Spitzer in a probe into fund-share-trading in 2003.

The firm’s assets under management of $191bn are less than half its peak total in 2000, although the figure has stabilised in the last year.

Power Corp is Canada’s biggest mutual fund operator via its majority ownership of IGM Financial.       

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