Element Financial Corporation announced that it has entered into a definitive agreement to acquire the assets and operations of PHH Arval, PHH Corporation’s North American fleet management services business (the “Transaction”). Under the terms of the agreement, Element will pay approximately US$1.4 billion for the business in an all-cash transaction representing a purchase price multiple of 1.56 times the adjusted book value of the acquired business. At March 31, 2014, PHH Arval reported more than US$4.6 billion in total assets, of which US$4.0 billion represented net investment in fleet leases, and generated annual origination volumes of approximately US$1.7 billion during 2013.
“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,” said Steven K. Hudson, Element’s Chairman and Chief Executive Officer. “It provides us with a fully integrated North American fleet management offering that complements our other three business verticals at the same time that it is accretive to our shareholders and immediately improves our capital efficiency,” added Mr. Hudson.
On a pro forma basis giving effect to the Transaction, Element will have combined total assets of approximately $10 billion. The acquisition of PHH Arval is expected to be more than 10 percent accretive to Element’s shareholders in 2015 and 2016 on an adjusted operating and cash EPS basis and is expected to increase Element’s balance sheet leverage to approximately four to one on closing.
“PHH Arval’s service culture is renowned in the North American fleet management industry and we are very excited about the opportunities that we see emerging from combining their operations with Element’s existing domestic fleet management business,” said Bradley Nullmeyer, Element’s North American President. “We also see exceptional growth opportunities for the combined business by being able to offer a North American-wide fleet management solution to customers that we service in our other business segments,” added Mr. Nullmeyer.
“This acquisition, and the concurrent expanded funding arrangements that we have put in place, will transform both sides of our balance sheet resulting in improved economics for each of our business lines going forward,” noted Michel Beland, Element’s Chief Financial Officer. “In addition, the transaction provides Element with an additional US$600 million of tax deferrals which will push out the expected time horizon for the payment of cash taxes to more than 15 years,” added Mr. Beland.
As part of the Transaction, Element will acquire the employees, systems, intellectual property, operations, offices, agreements and other assets that PHH Arval currently employs to service its North American fleet customers. A Transition Services Agreement between Element and PHH Corporation, under which PHH Corporation and Element will continue to provide various services to each other during the transition period, will ensure that service to those customers, suppliers and employees will not be disrupted in any way following the closing of the transaction.
The Transaction, which is expected to close on or before July 31, 2014, is subject to customary closing conditions, including regulatory approvals, and post-closing purchase price adjustments.
Transaction Funding
To finance the Transaction, Element has obtained a commitment letter for a syndicated secured bridge non-revolving credit facility of up to USD$1.36 billion pursuant to a non-revolving bridge credit agreement between Element as borrower, the financial institutions identified therein as lenders and Bank of Montreal as agent (the “Bridge Agreement”). Element also announced plans to sell on a “bought deal” basis $750 million of subscription receipts, $250 million of extendible convertible unsecured subordinated debentures and $100 million of perpetual preferred shares (the “Offerings”), see Element’s news release dated June 2, 2014 entitled “Element to Raise $1.1 billion of New Capital in Conjunction with Acquisition of PHH Corporation’s North American Fleet Management Business”. The completion of the Offerings is expected to result in a reduction in amounts required under the Bridge Agreement to finance the Transaction. Element’s senior management team, together with the members of its board of directors, is purchasing more than $10 million worth of shares on the Offerings. To fund the expected continued growth of each of its four North American equipment finance verticals, as part of this transaction, Element has negotiated an expanded and improved senior credit facility in the amount of approximately $1.5 billion that enables access to additional U.S. term liquidity and improved net interest margins.
Guggenheim Securities, LLC and BMO Capital Markets acted as financial advisors to Element in connection with the Transaction. Blake, Cassels and Graydon and Cravath, Swaine and Moore acted as legal counsel to Element.