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Tax Issues Could Stall PHH's Business Split Plans

NEW YORK (The Deal) -- PHH's (PHH) plan to separate its fleet management and mortgage businesses could be complicated and very expensive because of the deferred tax liabilities that the company will have to deal with, according to some analysts.

"I don't see how they are going to pull off a split," FBR Capital Markets Corp. analyst Paul Miller said by phone Wednesday. "It's not impossible, but still it would be a very expensive and highly difficult transaction."

Mount Laurel, N.J.-based PHH first announced Feb. 11 that it was looking to split and sell its fleet management business, PHH Arval. The Deal Pipeline has learned that PHH is negotiating with Element Financial Corp. regarding a sale of PHH Arval.

The idea to split the businesses was first introduced by activist Daniel Lewis of Orange Capital LLC, a 5% stakeholder who in a 13D filing with the Securities and Exchange Commission on Sept. 19 asked that the PHH board retain advisers to carry out a sale of the company as a whole or in parts.

Analysts said PHH Arval could fetch anywhere between 1 and 1.2 times book value in a sale, a traditional benchmark for valuing fleet management and financial services businesses. Based on that range, the total transaction value could range between $400 million to $500 million.

But industry watchers suggest that PHH's divide-and-divest strategy is flawed.

Kevin Barker, an Compass Point LLC analyst, said there would be "massive" expenses associated with deferred-tax liabilities that would result during a business split.

"This is not an easy transaction," Barker said by phone, "PHH requires a huge amount of cash outflow to structure such a split."

To execute such a split, PHH would have to restructure its debt, which currently stands at $1.2 billion. In addition, there would be tax costs of up to $175 million.

PHH, as a result, could end up taking on more debt, a step both analysts agree would be undesirable given the company's existing condition.

"A two-stage transaction is the likely solution," Barker said.

One stage would mean a suitor such as Toronto-based Element could buy the entire company, integrate the fleet management business into its business operations, and then sell off the mortgage business to a third buyer.

Element senior vice president, John Sadler, couldn't be reached for comment.

PHH declined to comment, but during a Feb. 11 conference call, CEO Glen Messina said the company was working with its advisors to minimize the friction costs of separating the businesses.

PHH is working with JPMorgan Securities LLC and Centerview Partners LLC for financial advice. Kirkland & Ellis LLP is the company's legal counsel.

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