PHH agrees to buyout offer HFS Inc., Avis owner and hotel franchiser, to pay $1.7 billion

November 12, 1996|By Sean Somerville | Sean Somerville,SUN STAFF Bloomberg Business News contributed to this article.

PHH Corp., the 50-year-old Baltimore company that quietly capitalized on corporate America's transportation and housing needs, agreed yesterday to be taken over by HFS Inc. of New Jersey for $1.7 billion.

PHH, based in Hunt Valley, employs 5,470 people, including 1,000 to 1,200 in Maryland, in its fleet management, relocation and mortgage servicing businesses. Officials said it is too early to tell if the purchase would result in layoffs, or if PHH would remain headquartered in Maryland.

"All of the business segments of PHH fit so well in our business that I wouldn't expect any significant downsizing," said Henry R. Silverman, HFS' chairman and CEO.

PHH offers its services to businesses, government agencies, financial institutions and membership groups in North America and Europe. Last year, it had total revenues of $600 million and net income of $86 million.

HFS franchises hotels that include the Days Inn, Ramada and Howard Johnson chains. It operates the Century 21, Coldwell Banker and Electronic Realty Associates real estate franchises. As does PHH, the company owns relocation businesses. HFS recently bought the Avis Inc. car rental system. In 1995, HFS reported $361 million in sales and net income of $79.7 million.

Robert D. Kunisch, PHH's chairman and CEO, said Wall Street has never appreciated the value of PHH, a company with a stock price that has never kept pace with its earnings growth.

"I think this is what it took," he said. "The stock was too thinly traded. We just didn't have a large enough audience."

Said Silverman: "We think we're paying a fair price. There are only 12 Rembrandts in private hands. This, to us, is a Rembrandt."

The acquisition by HFS is valued at $49.50 per share -- 61 percent higher than PHH's $30.75 closing price Friday.

The deal, announced before the start of trading yesterday, sent PHH shares up $16.75, to $47.50, in record trading. HFS shares )) fell $1.25, to $72.875.

Both companies hailed the combination as a good strategic fit.

The CEOs singled out the marriage between HFS real estate brokerage offices like Century 21 and PHH's mortgage banking division -- the nation's 12th largest mortgage lender.

HFS will issue about 23.2 million shares of common stock for all of PHH's 34.8 million shares outstanding. The transaction will be tax-free to shareholders.

Negotiations between the companies began in early October, Silverman said, with both sides agreeing to quickly make a deal or to walk away.

"Everybody got taken a little by surprise on this one," said Alex Hart, a Baltimore-based analyst who follows PHH for Ferris, Baker Watts Inc. in Baltimore.

Kunisch said the timing of the deal should not have been such a surprise. He said PHH had built its business by marketing its services, not only to companies but also to groups such as unions. He said the company needed to improve its reach.

The merger with HFS -- and the association with companies names such as Avis and Century 21 -- will give PHH leverage in the marketplace that otherwise would require millions of advertising dollars. The deal also will give PHH more services to sell from its telemarketing operation and to its affinity group customers.

"Of any combination, this one has the greatest advantages and the smallest amount of overlap," Kunisch said.

Kunisch, who owned 812,034 shares of PHH in June, will join HFS' board after the deal closes. That is expected in the first quarter of 1997.

Silverman said PHH's mortgage lending operation will allow Parsippany, N.J.-based HFS to compete for the $78 billion in mortgages generated last year by its real estate brokerage offices.

"We want a piece of that action," he said. "We have been asked by brokers and agents to find a way they can originate mortgages at the point of sale. Now we'll have it."

The announcement of the purchase comes after a 15-month period in which HFS committed $4.4 billion to buy Century 21, Coldwell Banker, Avis and other companies.

Silverman said the combination of Avis and PHH's vehicle leasing operation will make HFS the world's largest purchaser of tires, batteries and gasoline -- an economy of scale sure to result in savings. The purchase will give HFS a huge customer base, especially in light of PHH's growing business with large groups.

"It's strange that we found a business that fits in so well with all of our segments," Silverman said.

Hart, the Ferris, Baker Watts analyst, said the sale is not as surprising as the timing of it.

"The rumor of the company being broken up piecemeal or sold in its entirety has been around for about a year," he said. "But everything was chugging along pretty well. And Kunisch and others were upbeat on the future."

Hart said Wall Street is bound to welcome the combination of the two companies. He said any other buyer would likely have been big players in one of PHH businesses.

"I don't know of anybody else out there who could have pulled off the deal without running into antitrust problems," Hart said.

Some HFS investors called the company's strategy risky, because its expansion depends on buying companies with small sales growth. Revenue for PHH's biggest earnings division, vehicle management, rose just 1.6 percent last quarter.

"At some point, you start wondering where the longer-term sustainable growth is going to come from," said Kenneth Bragdon, portfolio manager at Aeltus Investment Management, which owned more than 600,000 shares of HFS in June.

Jerome Geckle, who served as PHH's chief executive from 1978 to 1988, said the purchase will be a great benefit to shareholders but a little disappointing for Baltimore.

"PHH came to life here," Geckle said.

"Along with McCormick, Black & Decker and USF&G, it used to be called one of the pearls of the Chesapeake. You would like to think that the company can continue as an independent company, but in this day and age, it's not always possible."

Pub Date: 11/12/96

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