Inside Element Financial's Acquisition of PHH Arval

Element Financial Corporation, a Canadian-based equipment finance company, acquired PHH Corporation's North America fleet management unit for $1.4 billion in cash, and will issue $1.1 billion in capital to pay for the deal.

Element Financial, headquartered in Toronto, will add more than $4.6 billion in assets with the acquisition of PHH Arval, including more than $4 billion of net investment in fleet leases.

It will also assume $3.5 billion in debt. The transaction closed July 7, 2014. With total assets in excess of $10 billion, Element Financial is one of North America's leading equipment finance companies.

Element Financial operates across North America in four verticals of the equipment finance market — commercial & vendor finance, aviation finance, railcar finance, and fleet management. Element Financial Corporation was founded in 2007. Following the consummation of the acquisition, Jim Halliday was named president, North America, of Element Fleet Management, the new name for PHH Arval. Halliday reports to Brad Nullmeyer, president of Element Financial Corporation.

AF interviewed Halliday to learn more about how the acquisition will benefit the fleet management company and its clients. What follows are excerpts from the interview:

AF: Could you provide AF readers background on your new parent company, Element Financial Corporation?

Halliday: Many fleet managers in the U.S. aren't familiar with Element Financial Corporation.

As background, the founders of Element Financial were also the founders of Newcourt Credit Group. In the mid-1990s, Newcourt acquired BML Leasing and Tilden Vehicle Leasing and then sold its fleet business to Associates in June 1999, so they're not newcomers to fleet management. Following the financial crisis of 2008-2009, the CEO of Element Financial, Steve Hudson, saw an opportunity to reenter the leasing business, in particular the asset leasing business, as banks pulled back from equipment funding. Steve and his team have put together a business serving four verticals: commercial & vendor finance, aviation finance, railcar finance, and fleet management. Of those four verticals, fleet is now the largest, representing $6.5 billion out of a $10-billion company. As you know, the GE Canada fleet portfolio was acquired by Element Financial in 2013, and, earlier, they acquired the Transportaction Lease Systems (TLS) fleet leasing business, which was owned by Scotiabank.

However, Element really needed a North American platform for its further growth and the acquisition of PHH Arval offered that opportunity.

When a client asks "what's in it for me?" first and foremost I start by saying all the things you love about PHH Arval are not going to change. Your customer team and all the day-to-day support you currently have will remain the same. Element Financial has been really clear that it values the customers and service culture of PHH Arval, which were the top reasons it bought the company.

Element Financial Corporation also knew PHH Arval was good at developing new and creative products for clients. Element Financial highly values PHH Arval's industry-leading solution that balances services with asset funding. Although Element Financial's history is in asset funding, it sees the service model as something to be expanded into its other three verticals.

For us, it's an exciting time because we're now going to be able to fund more asset types for our customers. Our fleet management business is extending further into equipment leasing and related services.

Element Financial Corporation has a deep competence in heavy trucks and in 2013 acquired select portfolios of existing finance assets and origination platforms of Bush Truck Leasing in Cincinnati, Ohio. In addition, Element completed its acquisition of CoActiv Capital Partners in Horsham, Pa., in December 2012, and in 2013 rebranded it as Element Commercial & Vendor Finance. They also entered into a strategic partnership with the Celadon Group in Indianapolis, Ind. PHH Arval also has extensive heavy truck expertise. There are many synergies from a revenue perspective, and, most importantly, from a customer service perspective.

It's great to have an owner who is solely focused on fleet management and asset financing.

Element Financial Corporation acquired the PHH Arval platform, people, and leadership team, and brings a broad range of capital and finance structuring options. Element Financial wants to accelerate investments in our technology, and especially our mobile applications, ordering system, and telematics solutions.

AF: Could you provide more details about the four verticals that comprise Element Financial Corporation?

Halliday: Within the commercial & vendor finance vertical, Element Financial plays in transportation, construction, healthcare, energy, and franchise financing. We've identified several common customers where we're able to provide solutions for both franchise financing and the fleet, all in one business now. There are numerous other synergies that we can now offer our customers because of our new parent company. We have manufacturing customers that sell products to their end customers and those end customers will pay for that product either through a finance structure or with their own cash. For example, today Element Financial offers end-user financing for the purchase of Bobcat construction equipment across North America through Bobcat's dealer network. We can extend the same value proposition to a number of our customers in healthcare, manufacturing, energy, and food and beverage, who would benefit from offering a private label vendor financing solution for their customers or contractors.

The railcar finance vertical has attractive growth dynamics due to regulatory compliance and market demand. Many current fleet customers find this value proposition appealing. Aviation operates in both Canada and the U.S., and we're hearing interest from our customers for helicopter financing solutions.

AF: Ultimately, PHH Arval will transition the name to Element Fleet Management. When will this occur?

Halliday: Yes, Element Fleet Management will be our new name, transitioning in between now and the end of 2014.

We recognize we have many people who call us "PH&H" or know us as "PHH Arval," "PHH," or even the "blue bar." We were PHH for a long time, and accomplished a lot of amazing things. But, when you boil it all down, what's important is our customers, our employees, and the supplier relationships we have developed with other market participants. Whether we're Element Fleet Management or PHH Arval, we're still going to be doing all the same things and care about the customers just as much as we always have.

AF: Will Element Fleet Management be a U.S. subsidiary of Element Financial Corporation, a Canadian corporation?

Halliday: Element Financial Corporation is a Canadian publicly traded company, EFN, on the Toronto Stock Exchange and has a $3.8-billion market cap.

Element Fleet Management reports directly to Element Financial Corporation and we are a subsidiary of a Canadian company. I'm running a North American business and I have the president of our Canadian business, Patricia Furgiuele, reporting to me, which is very similar to how we operated as PHH Arval.

Nothing has really changed structurally and Element Fleet Management, (GE Canadian fleet portfolio and TLS business, both of which it purchased earlier) will eventually fold into the platform established as PHH Arval.

Element Financial has a transition services agreement to use the GE platform in Canada up until the end of the 2014 calendar-year. Our plan to accommodate a smooth transition for all Canadian clients to the PHH Arval system is well underway.

AF: Will your new ownership change the way you title vehicles? Currently, vehicles are titled under the D.L. Peterson Trust.

Halliday: The question is critical and one I like answering, as the way we title vehicles will not change. This is key to everything, making it seamless for our customer. We will rebrand our service cards over the next year, introducing new card technology benefits over the course of this process.

AF: Will the acquisition require recontracting with suppliers or clients?

Halliday: No. We structured the transaction so Element Financial could step into all contracts with clients and suppliers. We rely on our suppliers every day, so they're a critical part of our business. Our suppliers are pretty excited about the opportunities to scale across our growing North American client base.

AF: How does the acquisition affect the global alliance that PHH Arval has with other fleet management companies, such as sgfleet and Arval?

Halliday: Arval is the largest member of the global alliance. The other partners of the global alliance include sgfleet in Australia, Sumitomo Mitsui Auto Service in Japan, Comercial Arriete in Mexico, Mareauto in South America, Avis Fleet Services in Africa, and Windsor Fleet in Ireland. Our international partners appreciate having an owner that is so committed to fleet. They are excited to promote and grow our global alliance, which is a renewed focus area for many of our clients.

AF: Does the acquisition impact your credit rating, since your new parent is a non-U.S.-headquartered company?

Halliday: Element Financial has assumed PHH Arval's funding structures. Our clients are getting the same benefit from the structures and quality of funding we've put in place over many years. Element Financial is young in its history, and is growing quickly. The balance sheet, access to capital, cash flow, and the appreciation of share price, show that the company is very strong.

Again, if you look at what Element Financial paid for PHH Arval, $1.4 billion, and how easy they were able to raise equity to make the purchase, it sends a very powerful message that our owner is committed to growth. Element Financial Corporation has done eight strategic acquisitions in two-and-a-half years. This is its third acquisition in fleet. Element Financial has had no difficulty whatsoever raising capital and were oversubscribed every time.

AF: With Element Financial Corporation having such a strong financial position, does that open up new lease funding sources for your company?

Halliday: Absolutely. Element Financial has a diversified funding base because it funds many different asset types over many different structures. If you want to finance a railcar, that's a long-term asset, so it needs a different type of funding. Element Financial is very good at structuring transactions that make it work for the clients' balance sheets and P&L. Advantages offered over a bank is Element Financial is more nimble, creative, and able to adjust leasing structures to achieve client objectives.

AF: Will there be any changes to the customer-facing teams in the U.S. and Canada?

Halliday: In both Canada and the U.S., the customer-facing teams are going to remain the same and we are actively recruiting for a number of specialty roles in the U.S. We have added a number of material handling equipment experts and have more than doubled our truck engineering group. We also hired a number of heavy-truck mechanics and nearly doubled the sales force over the past year.

AF: With Element Financial being so acquisitive, in terms of eight acquisitions in the past two-and-a-half years, do you anticipate additional acquisitions?

Halliday: Yes. This is a strong, confident company that will grow by organic and inorganic means. It will look at focused, smart acquisitions that fit within one of the four core verticals, are accretive to earnings, and also fit within the return-on-equity profile the company is establishing. Fleet is a very attractive space and there are many well-run regional players in the U.S. and Canada.

At the end of the day, Element Financial has shown that they're a swift, agile, and forward-thinking participant in the consolidation of the fleet industry. Element Financial is in other market segments, too, but it is especially focused in fleet.

AF: What are the service areas and additional capabilities you're working on with your technology platform and do you anticipate those still continuing under the Element Financial Corporation ownership?

Halliday: Yes. I'll highlight a few key areas of focus. We are turning data into results and delivering business intelligence tools to provide our clients with information they previously didn't know or maybe weren't even aware they could access.

The PHH Arval technology platform has a suite of business analytics tools that allow customers to go much deeper into the granularity of their data, come up with ways to reduce cost, increase driver-asset productivity, and improve the safety profiles of vehicles and drivers.

Mobile technology is also an important area of focus for both our drivers and fleet managers. Bringing connectivity and data to their fingertips, no matter where they perform their job, allows for increased productivity and ease of use. We think, over the next several years, every car and truck will be connected. We're looking at a few other ways to use data from the vehicle that we're not using today — specifically we are focusing our efforts on impacting driver behavior and vehicle downtime.

We can use this connectivity to be more efficient for our customers and drive more services, which ultimately benefit our customers and us.

AF: Some industry observers view Element Financial Corporation as being primarily in the asset-finance business. How important is the service side of the business?

Halliday: Element Financial has always viewed services as important. Fleet management involves long-term and well-integrated relationships with customers because of services and connection with many different functions within the client's business.

If you think of customer intimacy, then PHH Arval's marquee customer relationships were the primary reason behind the acquisition.

Also important to Element Financial was a deep-rooted technology system and service platform that they can leverage and horizontally integrate. Our North American capabilities were the third reason. The fourth reason was the global Arval alliance, which is important because Element Financial can extend its global reach. The ability to customize services and provide different asset funding to our customers was also a huge factor favoring the acquisition. The Element Financial business in Canada has some really exciting and complementary capabilities in consulting that we're leveraging across the broader organization.

AF: What is Element Financial Corporation's long-term vision for itself in the North American market? Where does it see itself going? Where does it want to be?

Halliday: We've stated that, by 2016, we want to double our asset size to $20 billion. Element Financial is also committed to continued leadership in its four verticals. We like the growth profile of each vertical. Element Financial Corporation is already a $10 billion company and has a remarkable story in terms of stock appreciation, thus far. The 10 stock analysts who cover the company all have a very positive outlook on what Element Financial has accomplished and where the company is headed.