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Analyst: PHH Arval Could Fetch $650M

February 28, 2014, by Paul Clinton

Photo courtesy of PHH.
Photo courtesy of PHH.

PHH Arval could sell for as much as $650 million if the fleet management division were separated from PHH Corp.'s mortgage business, a Wall Street analyst told AutomotiveFleet.com.

A possible $650 million sale price would be about 1.5 times higher than the book value of PHH Arval, which Paul Miller of FBR Capital Markets pegged at $7 per common share. Miller said PHH Mortgage has a book value of $28 per common share. PHH, which trades on NASDAQ, closed Friday at $26.03 per share with 57 million shares outstanding.

PHH Corp. has reportedly entered talks to sell its fleet management unit to Element Financial Corp., a Canadian equipment financer and fleet management service provider, The Deal Pipeline has reported. Earlier this month, PHH hired three firms to explore spinning off PHH Arval.

Amidst this news, on Feb. 19, PHH named Jim Halliday to head its fleet management unit.

An outright sale of PHH Arval would be tricky, Miller said, due to $1.2 billion in outstanding debt incurred by PHH's struggling mortgage unit that tie the units together. A refinance would likely be required, but volatile earnings from the mortgage division may hamper the company's ability to raise capital. Element may be required to buy PHH Corp., and attempt to sell off the mortgage unit, Miller added.

The spin-off talks stemmed from a hedge fund manager, who has been actively acquiring PHH shares since at least September. As of Dec. 31, Orange Capital LLC held 3.35 million shares valued at $88.2 million. The firm ranked as the fifth institutional investor, according to SEC filings.

Orange Capital's Daniel Lewis, a managing partner, wrote two letters to Glen Messina, PHH president and CEO, pushing the company to separate its fleet management unit. Lewis declined comment to AutomotiveFleet.com when contacted Friday.

In a seven-page letter sent Sept. 19 and addressed to Messina, Lewis said PHH shares "trade at a discount" and offered four recommendations including pursuing "a tax-efficient sale or IPO of fleet management."

Lewis said PHH Arval could be worth between $664 million on the low end and $904 million on the high end. PHH Arval reported a 19.5 percent return on investment in 2012, according to the letter.

Lewis sent a second letter to Messina in October asking PHH to confirm if the company was pursuing the fleet spin-off.

In late December, George Kilroy resigned as president of the PHH fleet unit. The company installed Halliday as interim president.

On Feb. 11, PHH announced it had hired J.P. Morgan Securities, Centerview Partners, and Kirkland & Ellis to explore the spinoff. The company also reported 2013 and fourth-quarter earnings, including that the fleet management unit increased profit by $2 million to $22 million in that quarter.

In a Feb. 26 SEC filing, PHH reported challenges in the fleet industry as corporations face cost reduction initiatives and increasing fleet operating costs.

"While our average leased vehicle unit count is down slightly from 2012, we continued to grow the average balance of net investment in leases, as our mix has changed to include more expensive truck and service-type vehicles," the company stated.

By Paul Clinton

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