PHH Corp. is in talks to sell its PHH Arval fleet management business to leasing finance firm Element Financial Corp., according to The Deal, citing anonymous sources.
PHH Corp. said in its Feb 11 fourth-quarter earnings release that it has retained J.P. Morgan Securities, Centerview Partners and Kirkland & Ellis law firm to "assist in exploring ways to maximize shareholder value through the separation or sale of the company’s fleet business, mortgage business or both."
In October, it was learned that hedge funds that had recently increased their stake in PHH were pushing the Mt. Laurel, N.J.-based company to split up and individually sell its two major business units — mortgage and auto fleet leasing.
Specifically, a Sept. 19 letter from New York’s Orange Capital, which owns more than 5 percent of PHH, suggested shedding the fleet business and focusing on the mortgage unit. The investment community has long suggested selling the fleet business and buying back stock to enhance capital levels.
Toronto-based Element, which provides financing for industrial, aerospace and automotive equipment leasing, could be a good fit for PHH. An Element executive declined to speak to The Deal about the PHH rumors but did say it plans to expand its fleet business.
Analysts have said PHH Arval could fetch anywhere between $400 million to $700 million in a sale.
Analyst Henry Coffey of Stern Agee said in a Friday note to investors that he was lowering PHH's 2014 earnings per share estimate due to the challenging mortgage environment. He said he was not surprised that the company chose to change its direction from a slow moving turnaround to exploring strategic alternatives given the recent shareholder activism and potential fleet buyers expressing interest.
"However, the timing was somewhat surprising given management's overview of potential impediments to such a transaction [outlined in PHH's third quarter 2013 earnings call late last year]," Coffey wrote. "We suspect the challenging mortgage environment caused management to be more open to taking another look at ways to tackle the corporate debt and separate the fleet business without triggering its deferred tax liability."
Selling fleet and focusing on the cyclical mortgage business comes with some risks. Like every other large mortgage servicer, PHH has been forced to lay off hundreds of employees since interest rates rose in the second half of 2013, thus lowering refinancing activity.
In October, PHH said it was laying off hundreds of mortgage employees in Mt. Laurel and Jacksonville, Fla. It cut 365 jobs in Jacksonville but would not reveal the number in Mt. Laurel because it said it did not reach the threshold required to file a WARN notice. Most of the jobs lost in the fall were in the mortgage origination business.
PHH spokesman Dico Akseraylian confirmed Thursday that the company laid off more mortgage employees in Mt. Laurel, Jacksonville and Amherst, N.Y. due to "lower industry-wide demand" but would not specify the exact number in South Jersey, again citing that they were not at a level to trigger a WARN notice. The Philadelphia Inquirer claims 130 jobs were lost in South Jersey. The company did file a WARN notice in New York state saying it would be cutting 135 jobs in Amherst.
Akseraylian said the affected employees would receive 60 days of continued pay and benefits in addition to being eligible for severance and outplacement support. As for the Element situation, Akseraylian said he could not comment about specific rumors but noted the company was "going down the process of exploring these alternatives."
The same day PHH announced its fourth-quarter and 2013 earnings earlier this month, federal regulators accused the company of collecting kickbacks from mortgage insurers as part of a scheme dating back to 1995. PHH vigorously denied the charges made by the Consumer Financial Protection Bureau
While PHH deals with a challenging financial and regulatory environment for the mortgage business, CEO Glen Messina has received relatively high marks from analysts tracking the company. Messina, who inherited a company coming off losing $127 million in 2011, he has tried to address major issues since taking over in January 2012. Specifically, he has managed to pare down debt while building up cash. PHH earned $135 million in 2013, compared to $34 million in 2012.