PHH Corporation (PHH) has finally decided how to combat its shrinking business; by shrinking its business. The company has agreed to sell its fleet management business to Element Financial Corporation for approximately $1.4 billion in cash.
"After carefully evaluating strategic alternatives, the board and management team believe this transaction best positions our fleet and mortgage businesses to capitalize on their distinct strategic opportunities while maximizing value for our shareholders,” Glen Messina, president and CEO of PHH Corporation, said.
“We are pleased to have reached an agreement with Element, which has a strong commitment to the fleet management industry and to delivering the outstanding customer service PHH Arval (the company’s fleet business) customers have come to expect."
The sale brings months of speculation to an end. In October, it was first reported that PHH was considering a split of its fleet management and mortgage operations. When the company released its 2013 year-end earnings report in February, the murmurs of a split continued after the company reported that its mortgage applications declined by 18% in the fourth quarter.
The company’s slide continued into the first quarter of this year when the company posted a loss of $42 million or $0.73 per basic share in the first quarter of 2013.
Despite a warning from Moody’s Investors Service (MCO) that the company should not sell its fleet management services because “it would be a credit negative for PHH’s franchise,” the company agreed to the deal on Monday.
“Pursuant to the terms of the agreement, the transaction is structured as a stock-for-cash transaction, but will be treated as an asset sale for tax purposes under the U.S Internal Revenue Code,” the company announced. “Upon closing and subject to certain post-closing purchase price adjustments, PHH expects to record an after-tax gain of approximately $250 million to $300 million, and net proceeds after taxes and transaction expenses are expected to be approximately $750 million to $800 million.”
The company says that it expects to use the net proceeds from the fleet management business sale to “reengineer its operations and support infrastructure and make selective growth investments in its mortgage business, return capital to shareholders, and reduce its unsecured debt levels.”
The company says that it will continue to “execute its mortgage strategy, including strengthening its private label business model, enhancing scale and profitability of its mortgage business, and diversifying its funding sources for mortgage servicing rights.”
The company announced that Element will assume all of PHH Arval's fleet management operations in North America, including its office in Sparks, Maryland, which it expects to become Element's fleet headquarters.
“We are confident that we have the right strategy in place to respond to changing mortgage market dynamics and sustain a leading position in the mortgage industry,” Messina added. “This transaction sharpens PHH's overall strategic focus, enhances our financial flexibility, and positions us to deliver greater shareholder value."
The company expects the deal to close on or before July 31.