UPDATE 2-Element says to pay $1.4 bln for PHH auto leasing unit

Mon Jun 2, 2014 5:57pm EDT

(New throughout, adds confirmation of agreement, details of financing, quotes)

By Paritosh Bansal

NEW YORK, June 2 (Reuters) - Element Financial Corp has agreed to buy PHH Corp's auto fleet leasing business for about $1.4 billion in cash, and will issue $1.1 billion in capital to pay for the deal, the two companies said on Monday.

Toronto-based Element, which provides financing for industrial, aerospace and automotive equipment leasing, will add more than $4.6 billion in assets, including more than $4 billion of net investment in fleet leases, the company said. It will also assume $3.5 billion in debt.

The company is trying to exploit a sector largely abandoned by big banks after the financial crisis.

"This transformative acquisition achieves all of the strategic and financial objectives that we established when we set out to expand our domestic fleet management business into the U.S. market," Steven Hudson, Element's Chief Executive Officer, said in a statement.

The deal for the PHH unit, PHH Arval, should add more than 10 percent to Element's adjusted operating and cash earnings-per-share in 2015 and 2016, the company said. It is expected to close by July 31.

PHH said it will net between $750 million and $800 million from the deal. It should record an after-tax gain of between $250 million and $300 million, it said.

Last September, activist investor Orange Capital LLC urged PHH 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. In February, PHH said it was considering separating or selling its mortgage and auto fleet leasing businesses.

"After carefully evaluating strategic alternatives, the Board and management team believe this transaction best positions our fleet and mortgage businesses to capitalize on their distinct strategic opportunities while maximizing value for our shareholders," PHH CEO Glen Messina said in a statement.

Element will finance the deal through a bridge loan and by issuing $750 million in subscription receipts, as well as $250 million in convertible debentures and $100 million in 5-year preferred shares, it said.

PHH shares slid 0.9 percent to $25.25, while Element shares fell 2.6 percent to C$13.30 on Monday. The deal, which is expected to close by July 31, was confirmed after markets closed.

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 C$9 billion to C$11 billion of assets in a few years, up from C$3.3 billion at the end of last year.

Guggenheim Securities and BMO Capital Markets acted as financial advisors to Element, while Blake, Cassels and Graydon, and Cravath, Swaine and Moore acted as legal counsel to Element. (Editing by Jeffrey Benkoe and Matthew Lewis)

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