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Funding issues scupper PHH sale to GE, Blackstone

In another sign that troubles within the mortgage industry will continue this year, one of the largest originators of residential home loans announced yesterday that it was scrapping a planned US$1.8 billion sale because banks had failed to agree to finance the transaction.

PHH, a New Jersey-based mortgage and vehicle leasing company, announced in March that it was selling itself for US$1.8 billion to General Electric and the Blackstone Group, a large private investment company.

But as the mortgage industry continued to deteriorate, the banks financing the transaction -- Lehman Brothers and JPMorgan -- slashed the deal's loans by as much as US$750 million in September.

PHH said on Tuesday it was terminating the sale because Blackstone, which was to acquire the mortgage business, had failed to find alternative financing.

The termination comes as an embarrassment for Blackstone, which has built a reputation for closing deals even in the face of obstacles, and a disappointment for General Electric, which was hoping to acquire PHH's vehicle leasing business.

"We remain committed to the fleet services space, and this would have been a perfect fit," said Stephen White, a spokesman for GE. "We wanted to do the transaction."

A source close to Blackstone, who requested anonymity because the person was not authorized to be quoted, said the company had pushed lenders to honor their financing agreements, but had been unable to convince them that PHH's mortgage business was worth as much as was estimated in March, when the mortgage markets were steadier.

Blackstone was unwilling to pay the difference itself.

It is unclear what the collapse of the deal bodes for PHH. In July, the company's stock traded close to the US$31.50 a share that the acquisition had promised. But on Monday, it closed at US$17.64. Markets were closed yesterday, when the termination was disclosed.

In a statement announcing the deal's cancellation, PHH's nonexecutive chairman, A.B. Krongard, expressed disappointment and said that there "can be no assurance that any further exploration of strategic alternatives that the board may determine to undertake will result in any agreement or transactions."

PHH executives did not respond to calls seeking further comment.

Under the terms of the deal, Blackstone is liable for a US$50 million termination fee, payable to PHH.

GE is not required to pay a termination fee.

Last month, H&R Block, the tax preparation company, announced it was closing its mortgage lending arm after the private equity firm Cerberus Capital Management walked away from a deal to buy it for US$300 million.
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