Mortgage services provider PHH Corp. is in talks with leasing finance firm Element Financial Corp. regarding the sale of its PHH Arval fleet management business, according to a source close to the matter.
It was only a week ago, on Feb. 11, that Mount Laurel, N.J.-based PHH said it was exploring options of selling the company as a whole or in parts by separating its fleet management and mortgage services divisions.
PHH officials didn't respond to multiple calls. Element declined to comment on the PHH situation, but its senior vice president, John Sadler, said that, "generally speaking," the Toronto company is on the prowl for acquisitions in the fleet management space.
"The company has solid dry powder," Sadler said by phone, referring to cash it has set aside to pursue acquisitions. "Obviously, we exercise discipline in these matters, but fleet-management acquisitions is highly aspirational for Element."
Element, which provides financing for industrial, aerospace and automotive equipment leasing, established its fleet business in 2012, when it acquired fleet leasing company TLSI Holdings Inc. from Scotiabank for about C$146.7 million ($146.4 million), plus debt on May 15. More recently, Element acquired the Canadian fleet portfolio of GE Capital Corp. for C$570 million ($551 million) on May 31.
Sadler said Element intends to expand its fleet operations both organically and via acquisition.
While the source didn't reveal whether PHH and Element are discussing a price, analyst Paul Miller of FBR Capital Markets Corp., in a phone interview, said the unit could fetch from $400 million to $500 million.
Miller said that range represents between 1 times and 1.2 times PHH Arval's book value, which, he added, is a traditional benchmark for valuing fleet management and financial services businesses.
PHH's core business involves providing mortgage services to financial institutions and real estate firms. The services include collecting, remitting and managing payments.
In contrast is PHH's fleet management business, which deals with everything from financing a customer's truck fleet to maintaining it and, eventually, marketing it for sale, with numerous details and tasks in between.
"Their decision to split the business comes as no surprise," Miller said. "There is no synergy between the two."
That PHH should jettison the fleet management business to concentrate on its core operations was first suggested on Sept. 19 by Daniel Lewis of New York hedge fund Orange Capital LLC, which revealed a 5% stake in the company through a 13D filing with the Securities and Exchange Commission. PHH, through its Feb. 11 announcement, has said it wants to complete a transaction by the second quarter.
In an effort to do so, PHH has enlisted the help of JPMorgan Securities LLC and Centerview Partners LLC as financial advisers and Kirkland & Ellis LLP as legal counsel.
Selling the fleet management business would certainly have an impact on PHH's results.
For 2013, for example, PHH reported revenue of $2.8 billion, of which the fleet management contributed $1.6 billion, or 57%. The influence of that business is even heavier when it comes to PHH's profits. Over the same period, the fleet management segment reported a profit of $88 million, or 65% of the company's net income of $135 million.
PHH, which trades on the New York Stock Exchange under the symbol PHH, closed Tuesday at $26.11, slightly off Feb. 14's finish of $26.14. The company has a market capitalization of $1.5 billion.
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