GE Capital to buy PHH

The Baltimore Sun

PHH Arval, the auto fleet management business founded in Baltimore more than 60 years ago, will become part of a corporate giant for the second time in a decade.

GE Capital Solutions, the leasing, financing and asset management unit of General Electric Co., said yesterday that it will buy all of PHH Corp. for $1.8 billion, integrate the Sparks-based fleet management business with its own and immediately sell off the Mount Laurel, N.J., residential mortgage business to the Blackstone Group, a private investment firm, for an undisclosed amount.

PHH stockholders would receive $31.50 per share in cash at closing, representing a 13.3 percent premium over Wednesday's closing price of $27.81 a share. PHH stock jumped nearly 12 percent, or $3.29 yesterday, to $31.10 on the news.

GE said it's too early to tell what impact the acquisition, which must gain shareholder and regulatory approval, will have on PHH Arval employees, including 1,000 in Sparks. But they have lived with uncertainty for the past two years as PHH's board under the non-executive chairman, A.B. "Buzzy" Krongard, explored various options.

PHH has been struggling to untangle its books since it was abruptly spun off two years ago by Cendant Corp., a New Jersey conglomerate whose wide ranging holdings include real estate brokerages like Century 21 and Coldwell Banker, the Wyndham Hotel Group, online travel seller Orbitz, and Avis and Budget rental cars. Cendant bought the company in 1997.

PHH did not file 2005 year-end results until last November, and has yet to provide any financial statements for 2006 to the Securities and Exchange Commission. But what information there is hints at the growing impact of the housing slump on its mortgage unit, which primarily makes loans to homebuyers with good credit standing.

In 2005 PHH Arval had $1.7 billion in revenue and an $80 million profit, according to its delayed annual report, while the overall mortgage business had revenue of $760 million and a profit of $123 million.

In a January SEC filing disclosing some unaudited metrics of the business, PHH chief executive Terry Edwards said the fleet management services segment "performed at or above expectations for 2006, but these results were more than offset by the loss from the combined mortgage segments."

Edwards said the company expects to take a post-tax loss of between $22 million and $29 million for the year that ended Dec. 31.

However, he said, the mortgage business should return to profitability this year based on restructuring efforts, including work force reductions and the outsourcing of some back-office operations, which are expected to save $50 million.

Analysts and shareholders have been calling for PHH to split up the businesses through a sale like the one announced yesterday to reap their full value.

But at least one shareholder believes the price isn't good enough.

"The price is way too low," Lui Sykes, principal at Chatham, N.J.-based Pennant Capital, PHH's sixth-biggest shareholder, told Bloomberg News. Pennant owned 2.3 million shares, or 4.3 percent, of PHH as of Dec. 31.

"We would prefer to own this business for several years instead of holding out for a quick, short-term pop," Sykes said. He said it's his "expectation or hope" that shareholders oppose the transaction.

Krongard, who oversaw the sale of Baltimore investment bank Alex. Brown while he was its chief executive, said the PHH board concluded that the GE deal was the best option.

"Since PHH became an independent public company ... the board has periodically examined various alternatives in order to serve the interests of the company's clients, employees and stockholders," Krongard said in a statement. "After careful consideration we believe this transaction best addresses those interests. It will enable stockholders to realize the fundamental value of both businesses."

PHH Arval will be integrated "seamlessly" with GE Capital Solutions' fleet management business based in Eden Prairie, Minn., said Stephen White, spokesman for GE Capital Solutions. GE Capital offers leasing, fleet maintenance and accidental management for corporate clients. It has a fleet of 1.3 million cars and employs 2,900. The deal is expected to close during the third quarter, White said.

PHH Mortgage is among the top 10 residential mortgage originators in the country, according to the company, while PHH Arval is the second-largest fleet management services company in North America. It also is one of a number of prominent Baltimore companies absorbed by larger, out-of-state buyers in recent years.

Founded in 1946 by Baltimoreans Duane L. Peterson, Richard M. Heather and Harley W. Howell, the company operated fleets of corporate cars for clients. After going public in 1958, PHH began adding other business lines, including telephone and fuel cards, relocation services for corporate executives and a mortgage company. It also designed a telematics technology installed in each car that tells clients the routes traveled and the number and length of stops.

PHH Arval currently counts one-third of the Fortune 500 companies as clients and has about $5 billion in assets, according to the company.

As of Dec. 31, the company leased 337,000 cars, a 3 percent increase over 2005, according to the unaudited January filing. In addition, PHH Arval signed 38 new accounts during 2006, representing 22,000 units which will be phased in over the next three to five years.

In July, analyst Paul J. Miller of Friedman, Billings, Ramsey in Arlington, Va., told The Sun that the fleet management business would be better off on its own, and that the mortgage business would thrive as part of a bigger operation. Miller suggested the selling price would be about $32 or $33 a share - almost the actual price of the deal. Miller was traveling yesterday and unavailable for comment.

allison.connolly@baltsun.com

PHH Timeline

1946:

Duane L. Peterson, Richard M. Heather and Harley W. Howell form a partnership to manage company cars. 1954:

Business is incorporated as Peterson, Howell & Heather Inc.

1958:

Founders sell a 24 percent stake in an initial public offering.

1978:

Company renamed PHH Group Inc. Stock listed on New York Stock Exchange.

1984:

PHH acquires U.S. Mortgage Corp.

1988:

Company renamed PHH Corp.

1995:

PHH announces alliance with Arval Service Lease SA of France.

1996:

PHH announces $1.8 billion deal to be acquired by HFS Inc., forerunner of Cendant Corp. Sale completed in May 1997

1999:

Cendant sells PHH to Avis Rent a Car Inc. for more than $5 billion in cash, preferred stock and debt. The deal boosts Cendant's stake in Avis, which it spun off in 1997, from 19 percent to 34 percent.

2000:

Cendant acquires rest of Avis, giving it full control of PHH.

2005:

Cendant spins off PHH Corp., headquartered in Mount Laurel, N.J.. with PHH Arval, the fleet management business, remaining in Sparks. Shares listed on the New York Stock Exchange. A.B. "Buzzy" Krongard, who as chief executive oversaw the sale of Baltimore investment bank Alex. Brown and then became a top CIA official, is named non-executive chairman.

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