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Personal Capital deal will not hold back Great-West Lifeco's M&A ambitions – CEO

Great-West Lifeco Inc. unit Empower Retirement LLC's plan to buy digitally enabled wealth manager Personal Capital Corp. will not hamper the group's wider acquisition ambitions, GreatWest CEO Paul Mahon has said.

"This does not take us out of the game," Mahon told analysts on a June 29 call discussing the deal. He added that Great-West Lifeco would continue to look for opportunities to add scale to Putnam Investments LLC and Empower and "broaden our European businesses."

He said Empower itself was "well-positioned to participate in the consolidation of the U.S. defined contribution record-keeping space," and that the group as a whole "has the financial strength and capital available to pursue opportunities that fit our M&A objectives and advance our strategic priorities."

Great-West Lifeco, through Empower, will pay $825 million up front for Personal Capital, and an additional $175 million if Personal Capital hits net new asset growth targets. Personal Capital is 24.8% owned by IGM Financial, itself a majority-owned unit of Great-West Lifeco.

According to Great-West Lifeco's investor presentation, Personal Capital reported earnings before interest, tax, depreciation and amortization, or EBITDA, of $9 million in 2019, excluding customer acquisition costs. When acquisition costs are included, the company reported negative EBITDA of $41 million for 2019, although Great-West Lifeco expects it to become profitable on this basis during 2023.

The presentation also said Personal Capital has been growing both revenues and assets under management at a compound annual rate of 60% a year between 2015 and 2019.

Great-West Lifeco CFO Garry MacNicholas told analysts that the acquisition would start to have a positive impact on earnings per share in 2023. He said investments in customer acquisition designed to accelerate Personal Capital's growth would "constrain profitability in 2021 and 2022."

However, he said the group was expecting "highly attractive financial returns" from the deal including an internal rate of return, or IRR, "well in excess of the cost of capital."

One analyst noted that the deal implied a valuation of between 26x and 32x EBITDA, excluding acquisition costs, for Personal Capital, and asked how the company calculated a positive IRR on what appeared to be a high price tag.

Mahon replied that the deal is "a growth play," and that "the valuation is not an outlier in terms of these types of properties in any way." He also said there was a "synergy potential" with Empower, and the company was not considering its value as a stand-alone wealth manager, although even on that basis, "you could have gotten to a valuation pretty close to this," he argued.

He added that Personal Capital's wealth management capabilities would be "fundamentally transformational" for Empower's growth prospects and the contribution the unit could make to the group. He said digital platforms were "fundamentally the future of reaching mass-affluent Americans and we'll look to significant opportunities in other jurisdictions where we play as well."