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TMFAleph1 (94.94)

PHH: Risk Arbitrage With an Intrinsic Value Backstop

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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.

 
Total: 287 words

Time: 10 minutes (without spell-check and inserting links)

 
*** The above text was written (but not spell-checked) in ten minutes. As a result, some of it may not stand up to rational scrutiny. I apologize preemptively for any errors, omissions and misrepresentations. ***

6 Comments – Post Your Own

#1) On September 25, 2007 at 10:07 AM, TMFAleph1 (94.94) wrote:

*** ERRATUM ***

Although I love trees, the last sentence in the seond paragraph should read:

"Furthermore, there 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."

 

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#2) On September 25, 2007 at 10:37 AM, TMFAleph1 (94.94) wrote:

Today must not be my day for spelling (although it is my birthday), my correction should have read: "the last sentence in the second paragraph [...]"

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#3) On September 25, 2007 at 11:44 AM, TMFHelical (98.72) wrote:

I thought that Aswath Damodaran did a nice job of covering Arbitrage opportunities and pitfalls in "Investment Fables"

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invfables.htm#ch11

Zz

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#4) On September 25, 2007 at 11:52 AM, TMFAleph1 (94.94) wrote:

HelicalZz,

Thanks for the suggestion. I have skimmed through Investment Fables, but I haven't looked at the chapter on arbitrage.

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#5) On September 25, 2007 at 11:57 AM, StockSpreadsheet (72.85) wrote:

Happy birthday.

I often will type my stuff into Word first and then cut and paste it to post it.  That way, Word will catch the big errors, (like seond), though it will miss the small errors, (like trees), since they are correctly spelled words, just not the correct words for what was intended.  

Hope you have a wonderful birthday.

Craig 

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#6) On September 25, 2007 at 1:58 PM, TMFAleph1 (94.94) wrote:

Craig,

Thanks for your birthday wish.

I also compose my posts in Word first to spell check and perform a word count, but I didn't think to do that for the comments. Next time I'll give it a once-over at least before I hit 'Post Your Comment'.

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