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PHH Terminates Merger Agreement with GE: What's Ahead?

February 2008, by Mike Antich - Also by this author

The announcement that General Electric Capital Corp. (GECC) was going to buy PHH Corp., the parent company of PHH Arval, was an eye-opening announcement. The combined fleet portfolio of the merged company would have exceeded 1 million units, becoming the first million-unit fleet portfolio in the history of U.S. fleet management.

On March 15, 2007, GECC and The Blackstone Group, a private equity firm, agreed to acquire PHH Corp., headquartered in Mount Laurel, N.J. The agreement required that immediately following the merger closing, GECC would sell PHH’s mortgage business to Pearl Mortgage Acquisition 2 L.L.C., an affiliate of The Blackstone Group. PHH Mortgage, which formerly did business as Cendant Mortgage, is among the top 10 originators of residential mortgage loans in the U.S. The agreement also stipulated that the merger must be consummated by Dec. 31.

The size of the merged company would have been enormous, not only in terms of portfolio size, but also leverage in negotiating with OEMs, national accounts, and other fleet service providers. It was forecast that the merged company would increase its new-vehicle acquisitions to approximately 200,000 units annually.

In April 2007, Rich Laxer, president and CEO of GE Capital Solutions, announced that George Kilroy, president and CEO of PHH Arval, would serve as chairman of the merged company. Bob Mitchell, president and CEO of GE Capital Solutions Fleet Services, would be president of the merged company.

A team of GE and PHH employees was formed to analyze both companies’ processes, services, and systems. In addition, more than 100 PHH and GE customers volunteered to participate in advisory boards and focus groups.

However, the acquisition was thrown into doubt Sept. 17, when Blackstone revealed it might have a financing shortfall of up to $750 million amid a then-recent tightening in the credit markets. Suddenly the prospect of a merger was no longer a certainty and the industry was abuzz as to whether The Blackstone Group would be able to line up financing before the Dec. 31 deadline. As the deadline approached, the talk on the street was that an extension to the agreement would be negotiated between the parties. However, the opposite occurred.

New Year’s Day Anouncement

On Jan. 1, PHH Corp., the parent company of PHH Arval and PHH Mortgage, terminated the merger agreement because it had not been consummated by the Dec. 31 deadline. This action was precipitated by the inability of The Blackstone Group to obtain financing to acquire PHH Corporation’s mortgage business.

Three days after the termination announcement, Blackstone Capital paid PHH Corp. a $50 million reverse termination fee, which was stipulated in the original agreement. In turn, PHH agreed to pay up to $4.5 million of the fees of the third-party consultants Blackstone retained in connection with the merger process.

"I am disappointed that we could not conclude the transactions contemplated by the merger agreement," PHH Corp. Chairman A.B. Krongard said in a statement. "The board will determine in due course whether to continue to explore the company’s strategic alternatives. The board remains focused and committed to delivering value for our stockholders regardless of the decision."

Fast Start in 2008

Immediately following the termination, Kilroy said, "PHH Arval is well positioned to get off to a fast start in 2008." Kilroy said the fleet management company had completed its 2008 plans, budgets, and strategies, as well as some long-range planning beyond 2008. "We have the resources to fund our clients’ leases and meet their fleet management needs. We successfully renewed our funding facility in November and have just had our investment grade ratings confirmed by Moody’s, S&P, and Fitch," added Kilroy.

PHH's Perspective on the Terminated Merger

To gain a better insight into the impact of the termination of the merger agreement, AF interviewed George Kilroy, president and CEO of PHH Arval.

Here are his comments.

AF: Were there any other reasons for the termination of the merger agreement between PHH and GECC in addition to The Blackstone Group’s inability to acquire funding to purchase PHH Mortgage?

KILROY: PHH terminated the merger because it wasn’t completed by Dec. 31, 2007 under the terms of the merger agreement.

On Jan. 4, 2008, PHH Corp. received payment of the reverse termination fee from The Blackstone Group in connection with the termination of the merger agreement between PHH and General Electric Capital Corp.

We’re looking forward to moving on and putting our ideas and plans into action in 2008.

AF: What impact did the period between March 15 to Dec. 31 have on the generation of new business by PHH?

KILROY: Through the nine months ending Sept. 30, 2007, our net revenues were up 4.6 percent over the comparable period in 2006. We expect to release our year-end results on a timely basis and will begin 2008 with a good pipeline of potential new customers.

AF: What impact did this period have on the development of new products and services by PHH Arval? Was there any interruption in PHH’s product development cycle?

KILROY: As you know, PHH created client advisory boards to get input from our clients related to the proposed merger. The response from clients was tremendous, and their ideas and suggestions, not just about the merger, but about PHH’s business specifically, have been invaluable. As a result of their input, we’ve enhanced a number of existing services, including truck fuel and maintenance networks, PHH InterActive, and process management and moved forward on developing new capabilities — all with customer satisfaction and loyalty in mind. We’ve also maintained our leadership position in the areas of green initiatives, risk and safety, information management, and telematics.

AF: Was PHH’s competitive position in the market compromised by letting its competition to view its "books" during the due diligence period?

KILROY: No, we had all of the appropriate protections in place.

AF: What’s the current status of PHH Arval’s funding capabilities?

KILROY: One of the most critical elements for any leasing company is access to the financial resources needed to fund our business. Both PHH companies have successfully renewed the asset-backed funding arrangements that we use to finance our clients’ vehicle leases and mortgages. Just after the termination, Moody’s, S&P, and Fitch confirmed the investment grade ratings of PHH Corporation’s unsecured debt. As stated in the press release, the confirmation of PHH’s ratings reflects its strong position in the stable and profitable fleet leasing business, focus on high-quality mortgage product, and strong capital levels.

AF: How have PHH clients reacted to the termination of the merger?

KILROY: When the termination was announced, our sales and account teams spent a lot of time talking to clients and prospects to bring them up-to-date on the news. Their reactions have been positive and supportive. The most common response was, "Let’s get on with other things." And that’s the foundation of our message to clients: let’s get on with providing the services that you count on to manage your fleet effectively. As a service provider, conversations with our clients and potential customers should be about them and their challenges, not about us.

AF: What is PHH Arval’s focus for 2008?

KILROY: As we begin 2008, our focus — as always — is on the strategic initiatives that drive value for our clients. We’ll continue to ask for their feedback and input through client advisory boards, business reviews, and conversations with key contacts and leaders in their organizations to ensure that our strategies are aligned with their evolving needs.

Our focus on both the day-to-day details of fleet management and a vision for the future that drives superior customer service is what we feel makes PHH unique among all fleet management companies. That’s where we’ll channel all our efforts in 2008.

AF: Are there any other comments you would like to make?

KILROY: I learned a lot about loyalty and the value of relationships throughout this process. Sometimes we tend to downplay the personal relationship side of business in lieu of the sterile bottom line-driven world in which we live. The loyalty and confidence shown by our clients, their willingness to share with us their concerns and hopes for the future, and the loyalty of PHH employees was amazing. PHH also received tremendous support from our mutual business partners, such as Wright Express, the motor companies, national account companies, and others. I can’t thank them enough. At the end of the day, we are more convinced than ever our approach and service commitment to the fleet management industry is right.

GE's Perspective on the Terminated Merger

How does GE Capital Solutions Fleet Services view the impact of the terminated merger? To find out, AF asked Bob Mitchell, president and CEO of GE Capital Solutions Fleet Services, for his perspective.

"We certainly wanted to close this transaction; however, market conditions prevented this from happening," said Mitchell. "With or without a merger, GE’s unwavering commitment to being a strategic and stable partner for our customers and the fleet industry will not change. We are excited about the year ahead and will continue to develop new solutions, enhance our existing products, and make every experience customers have with us exceptional. Everyone at GE Capital Solutions Fleet Services is looking forward to helping customers succeed, now and for years to come."

Chonology of Events:

March 15, 2007 – GE and Blackstone agree to acquire PHH Corp.

April 20 – George Kilroy named to be chairman of the merged company.

Sept. 17 – Blackstone reveals it may have a $750 million financing shortfall in acquiring PHH Mortgage.

Dec. 31 – Deadline to consummate merger agreement.

Jan. 1, 2008 – PHH terminates merger agreement.

Jan. 4 – Blackstone pays PHH a $50 million reverse termination fee.

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