CORRECTED: GE and Blackstone to buy PHH for $1.8 bln

Corrects to show profit outlook specific to mortgages.

NEW YORK (Reuters) - General Electric Co. (GE.N) and private equity firm Blackstone Group said on Thursday that they would acquire mortgage and fleet management services company PHH Corp. (PHH.N) for $1.8 billion.

The offer, which pays a 13 percent premium to PHH's closing stock price of $27.81 on Wednesday, will lead to the splitting up of PHH's mortgage and vehicle fleet services businesses.

PHH shares rose more than 11 percent to $31.01 in early New York Stock Exchange trade.

PHH, which was spun off in 2005 from what was then known as Cendant Corp., consists of PHH Arval, which provides vehicle fleet management services to corporate and government clients, and PHH Mortgage, a retail originator and servicer of residential mortgages.

GE Capital Solutions, which already has a vehicle fleet management operation, will buy Mount Laurel, New Jersey-based PHH Corp. and keep PHH Arval while selling PHH Mortgage to Blackstone immediately after closing.

The move comes at a time when the U.S. mortgage sector has been under pressure from weakening demand. The subprime sector, which focuses on buyers with weak credit histories, is facing record levels of defaults, and many independent lenders are facing cash crunches.

But a source close to Blackstone said the firm, one of the largest in the private equity arena, likes things "at the bottom of the cycle."

The source also said that if the mortgage market wasn't already "at the trough, we're months from the trough."

In any case, subprime represents only 4 percent of the company's portfolio, with the remaining 96 percent being prime, he said.

Other sectors of the mortgage market, including "alt a" loans that require little documentation from the borrower, are also weakening. Prime loans are still performing well, but many investors are concerned about subprime turmoil extending to other portions of the mortgage market and the broader economy.

GE is paying 16 times expected 2007 earnings of $1.95 per share, according to Reuters Estimates, which is based on one analyst's estimate. That compares with a multiple of 8 times 2007 earnings at Countrywide Financial Corp. CFC.N, the largest U.S. mortgage lender, according to Reuters analytics.

PHH said in January it expected to post an after-tax loss of $22 million to $29 million for 2006. It expects a return to profitability in 2007 in its mortgage businesses due to $50 million in cost cuts, including a work force reduction.

The company anticipates origination of $41 billion in loans in 2007, it said in January.

The parties expect the acquisition to close in the third quarter.

Lehman Brothers advised GE and Blackstone on the transaction. JP Morgan also served as an adviser to Blackstone.