TMFAleph1 (94.05)

PHH: Risk Arbitrage With an Intrinsic Value Backstop

September 25, 2007 – Comments (6)

9:22 AM

Last month, I published a short article on Fool.com about merger arbitrage (or risk arbitrage). Since then, I have become more interested in this area, which is considered an advanced value investing strategy. I have even built up a superlative collection of books on this arcane strategy, including some rare texts. All this to say that it was with great interest that I read a piece in this weekend’s Barron’s on an interesting situation that of mortgage lender/ vehicle leasing company, PHH (NYSE: PHH).

PHH is the subject of a buyout offer of $31.50 from GE (NYSE: GE) and the Blackstone Group (NYSE: BX). GE wants the vehicle leasing business, while Blackstone has its eye on the mortgage lending business. As many buyouts at this time, PHH’s acquisition is the subject of some uncertainty due lenders’ apparent reticence to maintain the original financing terms (a credit market upheaval will make lenders jittery, after all). When lenders made their reticence clear, the stock fell 4 points to $24.50. Furthermore, tree is an added dependency in that there are two buyers and GE has said that it will not move forward unless Blackstone purchases the mortgage lending business.

What caught my eye, however, was not the complexity of the situation but the fact that the downside appears to be covered by the company’s intrinsic value. Both Pennant Capital (which owns 9% of shares) and Pzena Investment Management have said that the buyout price undervalues the company and Pennant Capital even went as far as to suggest in a letter to the company that shares could be worth $60 in two years. Little wonder then that although many Barron’s articles have no impact on share prices, PHH popped almost 5% yesterday.

 
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