Hedge Fund Seeks to Break Up PHH Deal

MT LAUREL, N.J. – Pennant Capital Management LLC, a Chatham, N.J.--based hedge fund that is building a significant stake in PHH Corp., called on the mortgage bank yesterday to unwind its agreement to sell out to GE Capital and private equity giant The Blackstone Group, and separate the company’s two main businesses with the spin-off its fleet management operations, instead. PHH has been a major player in the credit union market for at least two decades but became the dominant player in November 2005 when it acquired the mortgage operations of CUNA Mutual Group. That included 100,000 residential mortgages and a $13 billion servicing portfolio of credit union loans, as well as customer relationships with more than 1,000 credit unions. Pennant, which has built up an 8% stake in PHH, said the spin-off could double the returns of the proposed sale. “We believe that current conditions of the general mortgage market, the Company-specific circumstances and the tax implications of a sale and break-up of the Company will prevent realization of full value at this time,” Pennant said in a letter to PHH management, attached yesterday to a filing with the Securities and Exchange Commission. “We believe that instead, the Company should pursue a tax-free spin-off of the Fleet business. We estimate that this would allow existing shareholders to realize an estimated combined valuation of $48 to $66 per share over the course of 2 to 3 years, as vastly superior outcome to a sale at $31.50 per share in the third quarter of 2007.” The letter was signed by Alan Fournier, managing director of the hedge fund. PHH itself was spun off from Cendant Corp. in 2005. Under a deal announced March 15, GE Capital will acquire PHH for $31.50 a share, a total of $1.7 billion, then sell PHH’s mortgage business to The Blackstone Group for an undisclosed sum.