UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 13D/A
(Rule 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)
Under the Securities Exchange Act of 1934
(AMENDMENT No. 1)
PHH Corp.
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(Name of Issuer)
Common Stock
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(Title of Class of Securities)
693320202
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(CUSIP Number)
Alan Fournier
c/o Pennant Capital Management LLC
40 Main Street
Chatham, NJ 07928
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(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
April 26, 2007
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(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box
[ ].
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7 for other parties
to whom copies are to be sent.
(Continued on following pages)
(Page 1 of 7 Pages)
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* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page. The information required on the
remainder of this cover page shall not be deemed to be "filed" for the purpose
of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise
subject to the liabilities of that section of the Act but shall be subject to
all other provisions of the Act (however, see the Notes).
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CUSIP No. 693320202 SCHEDULE 13D Page 2 of 7 Pages
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1 NAME OF REPORTING PERSON
Pennant Capital Management, LLC
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |_| (b) |X|
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3 SEC USE ONLY
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4 SOURCE OF FUNDS
AF
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5 CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) |_|
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
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NUMBER OF 7 SOLE VOTING POWER
SHARES 0
----------- -----------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED 4,169,800
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BY EACH 9 SOLE DISPOSITIVE POWER
REPORTING 0
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PERSON 10 SHARED DISPOSITIVE POWER
WITH 4,169,800
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
4,169,800
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12 CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11
7.8%
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14 TYPE OF REPORTING PERSON
OO
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CUSIP No. 693320202 SCHEDULE 13D Page 3 of 7 Pages
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1 NAME OF REPORTING PERSON
Alan Fournier
c/o Pennant Capital Management, LLC
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |_| (b) |X|
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3 SEC USE ONLY
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4 SOURCE OF FUNDS
AF
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5 CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) |_|
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
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NUMBER OF 7 SOLE VOTING POWER
SHARES 0
----------- -----------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED 4,169,800
----------- -----------------------------------------------------
BY EACH 9 SOLE DISPOSITIVE POWER
REPORTING 0
----------- -----------------------------------------------------
PERSON 10 SHARED DISPOSITIVE POWER
WITH 4,169,800
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
4,169,800
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12 CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES |_|
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11
7.8%
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14 TYPE OF REPORTING PERSON
IN
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CUSIP No. 693320202 SCHEDULE 13D Page 4 of 7 Pages
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The Schedule 13D filed on March 22, 2007 by Pennant Capital Management, LLC, a
Delaware limited liability company ("Pennant Capital") and Alan Fournier, a
United States citizen ("Fournier") (collectively, the "Reporting Persons") with
respect to the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of PHH Corp., a Maryland corporation (the "Issuer"), is hereby amended
as set forth herein by this Amendment No. 1.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
Item 3 of the Schedule 13D is hereby amended and restated as follows:
Funds for the purchase of the shares of Common Stock reported herein to be
held by Offshore, Onshore, Qualified, Spinnaker, Windward LP and Windward Ltd.
were derived from their respective general working capital and margin account
borrowings made in the ordinary course of business. A total of approximately
$120.3 million was paid to acquire the shares of Common Stock reported herein.
ITEM 4. PURPOSE OF TRANSACTION
Item 4 of the Schedule 13D is hereby amended and restated as follows:
The Reporting Persons originally acquired the shares of Common Stock for
investment purposes in the ordinary course of business because they believed the
shares to be undervalued and represented an attractive investment opportunity.
On March 15, 2007, the Issuer announced that it had entered into a
definitive merger agreement (the "Merger Agreement") to be acquired by GE
Capital Solutions the "Merger"). Under the terms of the Merger Agreement,
shareholders of the Issuer would receive $31.50 per share in cash at the closing
of the Merger. The Reporting Persons do not believe that the merger
consideration adequately values the Issuer and, accordingly, do not believe that
the Merger is in the best interest of the shareholders of the Issuer.
Consequently, based on the currently available information and terms, the
Reporting Persons intend at this time to vote against the Merger.
On April 30, 2007, Pennant Capital delivered a letter to the Issuer's
board of directors outlining its objections to the Merger as being at a price
that is not reflective of the value of the Issuer and not being in the best
interest of the Issuer's shareholders based upon a number of factors, including
(i) current conditions of the general mortgage market, (ii) Issuer-specific
circumstances, including accounting restatements, and (iii) the tax implications
of a sale and break-up will prevent realization of the Issuer's full value at
this time. The letter urges the Issuer's board to pursue a separation of the
Issuer's mortgage and fleet business through a spin-off to allow shareholders to
realize the full valuation potential of the Issuer in the public market. The
foregoing description of the letter is qualified in its entirety by reference to
a copy of the letter attached hereto as Exhibit A and incorporated herein by
reference.
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CUSIP No. 693320202 SCHEDULE 13D Page 5 of 7 Pages
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The Reporting Persons and their representatives intend to monitor
developments relating to the proposed Merger including any details relating
thereto, on a continuing basis, and intends to thoroughly review the Merger and
all the alternatives available to the Issuer. At any time and from time to time,
the Reporting Persons may engage in discussions with members of the Board of
Directors of the Issuer and management of the Issuer as well as with other
shareholders of the Issuer and other interested parties regarding the Merger,
potential alternatives and other matters of interest to the Issuer's
shareholders, proposals for alternative transactions or structures to the
Merger, and with respect to the Reporting Persons' investment in the shares of
the Issuer, including, without limitation, the business, operations, governance,
management, strategy and future plans of the Issuer. The Reporting Persons also
reserve their right to review or reconsider their position and/or change their
purpose and/or formulate plans or proposals with respect thereto.
Except as described herein, none of the Reporting Persons has any plans or
proposals which relate to, or could result in, any of the matters referred to in
paragraphs (a) through (j), inclusive, of the instructions to Item 4 of Schedule
13D. Depending on various factors, including, without limitation, the status of
the proposed Merger and alternatives thereto, the terms of the Merger or any
alternative thereto that may arise, the outcome of the discussions, if any,
referenced above, the Issuer's financial position and business strategy, the
price levels of the shares of Common Stock, and conditions in the securities
markets and general economic and industry conditions, the Reporting Persons may
in the future take such actions with respect to their investment in the Issuer
as they deem appropriate including, without limitation, voting their shares of
Common Stock to support or oppose the Merger or an alternative, tendering into
an offer to purchase the Issuer's Common Stock, purchasing additional shares of
Common Stock or any of the Issuer's debt or other equity securities, selling or
otherwise disposing of some or all of their shares of Common Stock or any of the
Issuer's debt or other equity securities, short selling or otherwise hedging
some or all of their shares of Common Stock or any of the Issuer's debt or other
equity securities, in each case, in the open market or in privately negotiated
transactions or otherwise, or changing their intention with respect to any and
all matters referred to in this Item 4.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER
Paragraphs (a), (b) and (c) of Item 5 of the Schedule 13D are hereby amended and
restated as follows:
(a-b) Pennant Capital is the manager of each of Offshore, Onshore,
Qualified, Spinnaker, Windward LP and Windward Ltd., and consequently has voting
control and investment discretion over the securities held by each of Offshore,
Onshore, Qualified, Spinnaker, Windward LP and Windward Ltd. As of the date
hereof, the Funds collectively hold 7.8% of the outstanding shares of Common
Stock of the Issuer. Alan Fournier is the managing member of, and thereby
controls, Pennant Capital. The foregoing should not be
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CUSIP No. 693320202 SCHEDULE 13D Page 6 of 7 Pages
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construed in and of itself as an admission by any Reporting Person as to
beneficial ownership of shares of Common Stock owned by another Reporting
Person. In addition, each of Pennant Capital and Alan Fournier disclaims
beneficial ownership of shares of Common Stock owned respectively by Offshore,
Onshore, Qualified, Spinnaker, Windward LP and Windward Ltd. The percentages
used herein are based upon the 53,506,822 shares of Common Stock reported to be
outstanding as of March 15, 2007 by the Issuer in its Quarterly Report on Form
10-Q for the period ended September 30, 2006, filed with the Securities and
Exchange Commission on April 11, 2007.
(c) Information concerning transactions in the shares of Common Stock
effected by the Reporting Persons since the filing of the Schedule 13D on March
22, 2007 is set forth in Appendix I hereto.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
Item 7 of the Schedule 13D is hereby amended and restated as follows:
The following documents are filed as appendices and exhibits:
Appendix I: Transactions Effected Since March 22, 2007
Appendix II: Joint Filing Agreement (previously filed)
Exhibit A: Letter to the Issuer's Board of Directors
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CUSIP No. 693320202 SCHEDULE 13D Page 7 of 7 Pages
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Signature
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: April 30, 2007
PENNANT CAPITAL MANAGEMENT LLC
By: /s/ Alan Fournier
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Alan Fournier, Managing Member
/s/ Alan Fournier
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Alan Fournier
APPENDIX I
TRANSACTIONS EFFECTED SINCE MARCH 22, 2007
(All transactions were regular market transactions effected on The NYSE)
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Date of Person Amount of Price per
transaction effecting securities share
transaction Bought/ or unit
(Sold)
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4/20/07 Offshore 87,320 30.43
4/20/07 Onshore 23,750 30.43
4/20/07 Qualified 53,500 30.43
4/20/07 Spinnaker 33,500 30.43
4/20/07 Windward LP 112,010 30.43
4/20/07 Windward Ltd. 169,920 30.43
4/26/07 Offshore 106,320 30.56
4/26/07 Onshore 28,910 30.56
4/26/07 Qualified 65,140 30.56
4/26/07 Spinnaker 40,780 30.56
4/26/07 Windward LP 136,370 30.56
4/26/07 Windward Ltd. 206,880 30.56
4/27/07 Offshore 8,020 30.58
4/27/07 Onshore 2,180 30.58
4/27/07 Qualified 4,920 30.58
4/27/07 Spinnaker 3,080 30.58
4/27/07 Windward LP 10,290 30.58
4/27/07 Windward Ltd. 15,610 30.58
4/30/07 Offshore 111,390 30.58
4/30/07 Onshore 30,840 30.58
4/30/07 Qualified 68,560 30.58
4/30/07 Spinnaker 25,920 30.58
4/30/07 Windward LP 53,570 30.58
4/30/07 Windward Ltd. 81,220 30.58
EXHIBIT A
LETTER TO THE ISSUER'S BOARD OF DIRECTORS
Dear Members of the Board,
We are writing this letter to tell you that we strongly object to the
proposed sale of PHH Corp. (the "Company") to GE Capital Solutions ("GE") and
The Blackstone Group ("Blackstone"). We believe the current conditions of the
general mortgage market, the Company-specific circumstances and the tax
implications of a sale and break-up of the Company will prevent realization of
full value at this time. We believe that instead, the Company should pursue a
tax-free spin-off of the Fleet business. We estimate that this would allow
existing shareholders to realize an estimated combined valuation of $48 to $66
per share over the course of 2 to 3 years, a vastly superior outcome to a sale
at $31.50 per share in the third quarter of 2007. By agreeing to sell the
Company to GE and Blackstone, the Company's Board of Directors has demonstrated
a lack of long-term commitment to the business and a lack of understanding of
shareholder value creation. Pennant Capital Management LLC currently owns
4,169,800 shares or approximately 7.79% of the total outstanding shares of the
Company based upon 53,506,822 shares of common stock reported by the Company to
be outstanding as of March 15, 2007.
The current cyclical downturn in the mortgage production business in the
U.S. has led to weak volumes and pricing for the Company and its competitors. In
addition, while the Company only has a minimal presence in the Subprime and
Alt-A mortgage markets, rising defaults in these market segments have
exacerbated investor concerns about the mortgage industry in general. This makes
it a particularly inopportune time to sell a mortgage business. Cyclicality in
the mortgage market is not new and it is only a matter of time until we return
to volume growth, expanding gain on sale margins and improved profitability.
While the industry in general is going through difficult times, the
Company's specific circumstances further obfuscate its underlying value. While
in the end, the accounting restatements have proven benign from an investor's
perspective, they have contributed to the perceived uncertainty and prevented
the Company from developing a mainstream shareholder base. In addition, the
restatements and the uncertainty around the Company's ownership prior to and
following the spin-off from Cendant have slowed the signings of new outsourcing
clients and have hurt the penetration of the real estate broker channel. This
has led to weaker than expected volumes and an oversized cost structure.
Importantly, all of these factors are temporary in nature and can be addressed
by the Company's own actions. They do not affect the Company's foundation of
success: The ability to provide clients that outsource with superior economics
based on its unique call center platform and historical industry-leading cost
structure and customer service.
We agree with GE's and Blackstone's decision to separate the mortgage
business from the fleet business. There are no synergies between these two
business units and they appeal to different shareholders. However, it appears
that the tax leakage in a sale is prohibitive. Both the mortgage servicing
rights ("MSRs") as well as the vehicle fleet have much lower tax values than
book values. A sale of one of these businesses requires the seller to write-up
either the MSRs or the fleet for tax purposes, resulting in a taxable gain on
sale. While we hope to learn more about the tax consequences of the proposed
sale by GE in the Proxy Statement, a crude estimate would be the deferred income
tax liability related to unamortized MSRs as of December 31, 2005. This estimate
is $9.51 per share or 30% of the proposed per share deal valuation. This
prevents buyers from realizing the full value of the Company, but as existing
shareholders we likely could benefit from a tax-free separation of these
businesses through a spin-off. It is our expectation that such a spin-off would
unlock immediate shareholder value as the fleet business likely would be valued
using a multiple of earnings or free cash flow, while the mortgage business is
unlikely to trade below tangible book value.
With or without a spin-off, we believe the GE and Blackstone offer
significantly undervalues the Company for shareholders with an investment
horizon greater than a few months. We believe the Fleet business will generate
$55 - $60 million in free cash flow in 2007. This assumes $95 - $100 million in
earnings before taxes, a 20% cash tax rate and a $20 - $22 million investment to
grow the fleet value at a
mid-single digits percentage assuming constant 10x leverage. A 15x to 17x
multiple of 2007 free cash flow would therefore yield a fleet valuation of $15
to $18 per share today or $16 to $20 per share in 2 years. We believe this to be
a conservative multiple for a predictable free cash flow stream growing in the
mid-single digits. With the vast majority of the interest rate and residual risk
passed through to clients, this is primarily a processing business. As the
market leader, we suspect GE will be able to extract significant synergies from
the business combination. A 5% to 10% reduction in operating expenses (excluding
any depreciation or interest expense associated with the fleet) would yield an
additional $15 - $30 million in EBT or $3 to $6 in value per share (which we
ignore in the subsequent discussion).
At the proposed deal price of $31.50 per share, the above fleet
valuation likely would imply that the mortgage business is worth less than its
tangible book value (even ignoring synergies). In other words, the deal
valuation is so low, that shareholders would likely be better off if the
mortgage business was liquidated instead of being sold at the proposed
valuation, a ridiculous proposition. This is unacceptable. We believe it is the
Board's fiduciary duty to shareholders to prevent such a deal from happening. We
anxiously await the possible basis for the "fairness" opinion in the Proxy
Statement.
We value the mortgage production business using a normal mid-cycle
pre-tax profit margin of approximately 40 basis points of mortgage origination
volumes. This level reflects the low-cost model of the call center platform,
which cuts out the typical commissioned loan officers and allows these economics
to be passed on to outsourcing clients. Furthermore, there are significant
economies of scale in originating mortgages. As a top 10 originator and the only
significant private label outsourcer, the Company captures some of the value
created when financial institutions with subscale mortgage platforms agree to
outsource. Our 40 basis points assumption is consistent with the Company's
operating history as well as the Company's prior comments. The Company's recent
signing of 8 new outsourcing clients with combined origination volumes of $3.6
billion (about 9% of the Company's 2006 total), as well as its disclosure that
it is in talks with 15 more potential clients with combined volumes of $5
billion, is a strong indication that the Company's historical edge has not been
lost.
We further assume around $45 - $50 billion in normalized origination
volume, reflecting new outsourcing partnerships and a stabilizing market. This
translates into $180 - $200 million in normalized mortgage production pre-tax
profit. For context, at the cyclical peak in 2003, the Company originated $84
billion in mortgages at a margin of 88 basis points, generating a $739 million
pre-tax profit.
We value the servicing business assuming a mid-cycle 8 basis points
servicing margin on the Company's current $160 billion servicing portfolio,
generating an additional $128 million in pre-tax profit. Assigning an 8x to 10x
multiple to the combined production and servicing earnings we get $26 to $34 per
share in value for the mortgage businesses.
Further, we assume the Company will earn an average of $3 to $4 per share
annually as it recovers to a normal profit level in 2 to 3 years. In total, the
Company's shareholders would realize a total value of $48 to $66 per share at
that time, comprised of $16 to $20 per share for the fleet business, $26 to $34
per share for the mortgage business and $6 to $12 per share in cumulative
earnings over the next 2 to 3 years. It is clear that if a sale can be
prevented, patient shareholders will be rewarded handsomely.
In conclusion, we are disappointed with the Board's pursuit of a sale of
the Company at a gross undervaluation. We believe these actions demonstrate the
Board operated merely as a "caretaker" with a limited time horizon and without
long-term commitment to the business or to shareholder value. Following a
shareholder rejection of this transaction, we urge the Board to pursue a
separation of the mortgage and fleet businesses through a spin-off and to allow
shareholders to realize the full valuation potential of the Company in the
public market.
Best regards,
/s/ Alan P. Fournier
Alan P. Fournier
Managing Member
Pennant Capital Management, LLC