Crunch hits PHH deal

The Baltimore Sun

The mortgage crisis and resulting credit crunch could sink a deal to buy the parent of PHH Arval, a vehicle fleet leasing company with 1,000 employees in Sparks, the company said yesterday.

The disclosure sent shares of parent PHH Corp. down nearly 15 percent, or $4.26, to close at $24.24, reflecting investor skepticism that PHH will be able to close a deal announced in March to be sold for $31.50 a share.

Under that deal, which valued the company at $1.8 billion, General Electric Co. subsidiary GE Capital Solutions planned to buy all of PHH, fold the fleet leasing operations into its own and immediately sell PHH's larger mortgage unit to Blackstone Group, a New York-based private equity firm.

But Blackstone has notified PHH that its banks are pulling back on the financing to buy the mortgage business, PHH said in a statement and filing with the Securities and Exchange Commission.

And GE's agreement to buy PHH is contingent on selling the mortgage unit to Blackstone.

"In the marketplace, the important thing is perception, not reality, and the perception is that the mortgage business is not a business you want to be in," A.B. "Buzzy" Krongard, PHH's non-executive chairman, said yesterday.

In reality, he said, PHH has little exposure to subprime mortgages - loans made to people with subpar credit. Subprime mortgages have been experiencing increasing default rates, causing a general tightening in mortgage lending and in credit generally.

Some mortgage lenders have filed for bankruptcy, others have retrenched and thousands of employees have been laid off.

The problems in the mortgage industry could be "a great opportunity" for PHH, Krongard said. PHH specializes in "private label" mortgages, in which it provides loans under the name of a bank or other company.

With the problems in the mortgage industry, he said, banks and other lenders may be looking to outsource their mortgage business to a company such as PHH.

Meanwhile, PHH said in a letter to shareholders yesterday, it intends to go ahead with a shareholder meeting to vote on the sale, scheduled for a week from tomorrow at its New Jersey headquarters, although "there can be no assurances ... that the merger will close by the end of the year, if at all."

Krongard declined to discuss any "Plan B" for PHH if the deal falls through.

"Right now, we're on Plan A," he said. "We don't know what GE is going to do," he added. "We don't know what Blackstone is going to do."

John Ford, a Blackstone spokesman, said yesterday that his company would have "nothing to add" to PHH's announcement, which, he said, "states the case pretty well."

PHH's filing yesterday said that Blackstone's lenders, JPMorgan Chase and Lehman Bros., had "revised interpretations" of their debt commitment, leaving Blackstone up to $750 million short of the money to complete the deal.

Blackstone will continue to seek financing, but "it is not optimistic at this time that its efforts will be successful," PHH said in a letter to shareholders.

Stephen White, a spokesman for Fairfield, Conn.-based GE, told Bloomberg News yesterday, "We continue to hope that Blackstone will succeed in arranging its financing so the merger can be completed. But if Blackstone is unable to complete its purchase, GE will not be obligated to complete the merger."

Kerrie Cohen, a spokeswoman for Lehman Bros., declined comment. JPMorgan Chase did not respond to a call seeking comment.

In addition to problems specific to the mortgage industry, the recent meltdown in credit markets has caused uncertainty for a number of high-profile buyouts.

Investment bankers say the market turmoil is making it difficult to find buyers for the high-yield bonds that underpin such deals, forcing some offers to be withdrawn in recent months.

Home Depot Inc. was forced to reprice a $10.3 billion deal to sell its wholesale supply unit after three major bankers threatened to walk away; and private equity firm Kohlberg Kravis Roberts & Co.'s $45 billion acquisition of Texas energy giant TXU Corp. is facing similar pressures. KKR has also made concessions to bankers to help win financing for its $24 billion leveraged buyout of credit-card processor First Data Corp.

PHH was founded in Baltimore in 1946 by Duane L. Peterson, Harley W. Howell and Richard M. Heather. Originally called Peterson, Howell & Heather, the company was renamed PHH Group in 1978. It acquired a mortgage company in 1984.

As fleet managers, PHH arranges leases and does maintenance on car and truck fleets for other companies. As of the end of March 31, it leased 340,000 vehicles, according to company statements.

The company was acquired in 1997 by HFS Inc., which morphed into the conglomerate Cendant Corp. Cendant also owned real estate brokers, the Wyndham Hotel Group, online travel site Orbitz ,and Avis and Budget car rental companies. Cendant spun off PHH in 2005.

Since then PHH has been struggling to straighten out its financial reporting - many of its earnings statements have been filed late.

Krongard and the board unanimously concluded that the GE deal was in the best interest of shareholders.

One large shareholder, Pennant Capital, a New Jersey hedge fund, wanted the company to reject the GE deal and wait for a higher price. Pennant did not return a phone call yesterday.

Sun reporter Paul Adams contributed to this article.

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