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PHH deal done in by tight credit

The Baltimore Sun

The collapse of PHH Corp.'s deal to sell itself is a lesson for these credit-crunched times: If you're in the mortgage business, don't count on anyone getting the money to buy you - no matter how decent your prospects look.

PHH agreed in March to sell out for $1.8 billion to General Electric Co., which wanted the company's Baltimore County-based vehicle fleet leasing arm and had agreed to immediately resell PHH's mortgage business to the Blackstone Group. But the complex deal began to unravel in September as the outlook for mortgage companies sharply worsened.

PHH announced Tuesday - New Year's Day - that Blackstone's financing fell apart, imploding the sale.

Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, said PHH represents the upside of the mortgage market - as much as there is an upside at the moment - because PHH handles prime loans for other companies, such as the financing arms of real estate brokerages. That is becoming "a very solid niche" because more buyers are turning to real estate companies for loans as other lenders have tightened standards or gone out of business, Cecala said.

"If this deal is adversely affected by the credit crunch and mortgage problems, I think it shows virtually every deal is in jeopardy," he said.

"There's not a lot of incentive to purchase a mortgage-related company these days. ... It's not going to get better any time soon, either," Cecala said.

That means uncertainty for PHH, which could try to strike another deal or continue indefinitely on its own. Its shares closed at $17.10 yesterday, the lowest since it went public three years ago - and a far cry from the $31-a-share price when the deal was struck in March. The company, based in New Jersey, employs 1,000 in Sparks in its PHH Arval fleet management services division.

"We had an attractive offer and we accepted it, and it didn't come through," A.B. "Buzzy" Krongard, PHH's non-executive chairman, said yesterday. "Whether we sell the business or whether we keep it, it's the same mission for us - to do the best we can. ... We have excellent people, we have good prospects, and what will be, will be."

PHH has asked Blackstone, a private equity firm in New York, to pay a $50 million termination fee because the deal was not completed by the end of the year as the agreement specified. Blackstone declined to comment yesterday on that request.

"Blackstone was prepared to close its end of the transaction using the financing that in March was originally committed to be made available," John Ford, a spokesman for Blackstone, said in a statement. "We regret that the banks are now unwilling to provide financing under the terms they originally agreed to."

GE, which said it isn't on the hook for any breakup fees, expressed disappointment that the deal fell apart. "We certainly wanted to do the transaction and remain committed to the fleet services space," said Stephen White, a spokesman for GE.

Dan Reid, who advises acquiring companies in his role as national managing partner for Grant Thornton's transaction advisory services group, wasn't surprised the deal didn't work out. Not only is PHH in the mortgage business, but the credit crunch has made any sizable acquisition tougher, he said.

Financing troubles were also blamed when a $1.35 billion deal to sell the Sparrows Point steel mill fell apart last month.

Ron Kerdasha, who manages the Baltimore office of LaSalle Business Credit, expects to see more of the same this year. "The financing contingencies on these deals are no longer going to be an afterthought," he said.

The evaporated deal is the latest in a series of bumps in the road for PHH, founded in Baltimore in 1946 and bought out in 1997 by a New Jersey company. PHH struggled to file timely audited financial statements after it was spun off from Cendant Corp. in 2005.

And even with its better-than-average mortgage niche, it's hurting from the two-year-old slump in home sales and the pullback in credit for mortgages, which started in the summer with subprime and quickly rippled through the rest of the industry. PHH lost $38 million from July through September.


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