Element In Talks To Buy PHH Arval

Canadian equipment finance company Element Financial Corp. is in talks to buy PHH Corp's fleet leasing business for about $1.35 billion in cash, in a deal structured to include significant tax benefits. PHH said in February it was considering separating or selling its mortgage and auto fleet leasing businesses. The deal for the fleet leasing business, PHH Arval, would help improve the balance sheet of PHH, which has a market capitalization of just over $1.2 billion and more than $5 billion in debt.

Last September, activist investor Orange Capital LLC urged the company to hire a financial adviser to sell or float its fleet management services and create a finance vehicle to own a stake in its mortgage servicing and origination business.

Element, an upstart Canadian company that provides financing for industrial, aerospace and automotive equipment leasing, is trying to exploit a sector largely abandoned by big banks after the financial crisis. It plans to keep the unit's employees and use the business as a platform for future acquisitions.

In a January interview with Reuters, Element Chief Executive Steven Hudson said the company plans to seek acquisitions in the United States and Europe. He predicted the company could have $9 billion (Canadian) to $11 billion (Canadian) of assets in a few years, up from $3.3 billion (Canadian) at the end of last year.

PHH's fleet leasing business, which provides auto lease financing and services to government agencies and corporate clients, including Fortune 100 companies, has about $3.6 billion of fleet leases. Analysts initially expected the business to fetch around $700 million.

The transaction was structured using a step-up in tax basis, which allows the unit to be valued at its market price instead of its value on the company's books.

The fleet leasing business' book value as of March 31 was $405 million. But accounting for the tax step-up adds more than $400 million to that value, to roughly $850 million. The expected purchase price represents about 1.6 times the business' book value. The step up in basis will also allow Element to reap more than $500 million of future tax benefits as it gets to depreciate the assets again.

PHH will benefit from its net operating losses, which arose from past losses and can be used to reduce its taxable income and gains.