Avis buying PHH from Cendant

$5 billion deal for auto-leasing unit based in Hunt Valley

`Natural fit'

Purchaser and target both bought earlier by a forerunner of seller

Consolidation

May 25, 1999|By Sean Somerville | Sean Somerville,SUN STAFF

PHH Vehicle Management Services, the Hunt Valley-based car-leasing subsidiary of Cendant Corp., will be sold to Avis Rent A Car Inc. in a transaction valued at more than $5 billion.

The deal comes a little more than two years after 51-year-old PHH Corp. -- which provided vehicle management, relocation and mortgage banking services through corporate clients -- was sold to a forerunner of Cendant.

The terms call for Cendant to get $1.5 billion in cash and $360 million in preferred stock -- boosting Cendant's interest in Avis from 19 percent to 34 percent. Avis also will assume $3.34 billion in debt from the auto-leasing business.

PHH Vehicle Management Services, which employs more than 900 people in Hunt Valley and 2,550 worldwide, said joining forces with Avis would foster growth.

"Historically, PHH has been about providing long-term vehicle transportation services," said Mark Miller, PHH's chairman and chief executive officer. "Avis is well known as a short-term or daily rental provider. Combining these two allows us to offer corporate clients a full range of services." Miller said PHH does business with 19,000 companies in North America and Europe, and Avis has relationships with with more than 115,000 companies -- many of them small. Together, the two companies will buy more than 350,000 vehicles a year. "Cross-selling our services to our respective client bases is a clear-cut opportunity," he said.

Kevin M. Sheehan, executive vice president and chief financial officer of Avis, the world's second-largest car rental company, called the deal a "natural fit," saying PHH's information technology would provide a jump start for Avis' system.

Cendant, which will keep PHH's relocation and mortgage business, said the deal marks the end of a "strategic realignment" intended to sharpen the company's focus and reduce its debt after an accounting-fraud scandal pounded the company's stock.

Cendant shares rose 68.75 cents to $19.875 yesterday; Avis shares fell $7.375 to $28.

Tony Fuller, vice president of media relations for Garden City, N.Y.-based Avis, said: "Long term, we're convinced that this is in the best interest of the company and in the best interest of stockholders."

The transaction joins two companies that were gobbled up as HFS Inc., the small company that franchises hotels such as Howard Johnson and real estate brokerages such as Coldwell Banker, went on a five-year buying spree.

HFS bought Avis in 1996 for an undisclosed price. It bought PHH in 1997 for $1.8 billion.

HFS' stock price rose higher with every acquisition until the company merged with CUC International Inc., a direct-marketing powerhouse, to create Cendant in 1997. Accounting fraud later discovered at CUC helped push Cendant's shares down 13 percent over the past year.

To recover credibility, raise money and sharpen its focus, Cendant sold several properties, including its software business. Cendant said it will focus on travel, real estate, direct marketing and service businesses.

Cendant's sale of PHH Vehicle Management Services to Avis also includes the sale of Wright Express, which provides fuel management services to commercial customers.

The deal will give Cendant an after-profit gain of $750 million, with total proceeds after taxes and expenses at $1.7 billion.

Lewis H. Alton, an analyst who follows Cendant for his San Francisco-based firm, said: "I think it's a good move for Cendant. They said they were going to sell a lot of assets to liquefy the company. This is another step in that direction."

PHH Vehicle Management Services, which has annual sales of $387 million, manages 700,000 cars. Avis, which was spun off by Cendant in an initial public offering of stock in 1997, had 1998 sales of $2.3 billion. It manages 200,000 cars.

"We have been interested in PHH for a very long time," said Fuller, the Avis vice president. "When HFS acquired them, we were interested then."

Avis plans to pay for the acquisition partially through the sale of $500 million in bonds and a $1 billion bank loan. The deal, which is expected to become final by June 30, will dilute earnings per share slightly in 1999, then add slightly to earnings in 2000 and significantly in 2001, Avis said.

Avis does not expect job cuts. "It's a growth deal," Fuller said.

Pub Date: 5/25/99

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