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. 2)
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)
June 20, 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 5 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 5 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 5 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|
------------- -----------------------------------------------------------------
3 SEC USE ONLY
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4 SOURCE OF FUNDS
AF
------------- -----------------------------------------------------------------
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
4,169,800
WITH
------------- ----------- -----------------------------------------------------
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 |_|
------------- -----------------------------------------------------------------
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 5 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 referred to herein as 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"), as amended by Amendment No. 1 to the Schedule 13D filed on April 30,
2007, is hereby amended by this Amendment No. 2 to the Schedule 13D.
ITEM 4. PURPOSE OF TRANSACTION
Item 4 of the Schedule 13D is hereby amended by the addition of the following:
On June 20, 2007, Pennant Capital sent a letter to the Issuer's board
of directors reiterating its strong objections to a sale of the Issuer at this
time at the proposed consideration and outlining several material omissions from
the preliminary proxy statement ("Preliminary Proxy") filed June 18, 2007,
including: (i) the fairness opinions ignore the possibility of continued public
ownership and a spin-off and fail to quantify the significant tax savings
associated with such an approach; (ii) the Preliminary Proxy fails to break out
the purchase price allocation between the Fleet business and the Mortgage
business; (iii) the failure to disclose in the Preliminary Proxy any information
regarding future employment of Terence Edwards, PHH's CEO, and other members of
management in the Mortgage business after the completion of the sale; and (iv)
the omission of any long-term financial projections or any assessment of the
Mortgage business' structural cost advantage or full potential in a normalized
mortgage environment beyond 2008.
The letter also reflects that Pennant Capital is encouraged by the
accelerated profit growth in the Fleet business and the improvements in the
Mortgage business. Pennant Capital believes that a rejection of the proposed
transaction would allow shareholders to benefit from a continuation of these
trends and result in substantial rewards both immediately and over a two to
three year time frame. Additionally, a pursuit of a tax-free spin-off should
result in immediate appreciation of the Issuer's stock, as the standalone
mortgage company is unlikely to trade below book value. A copy of this letter is
attached hereto as Exhibit B and is incorporated herein by reference.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
Item 7 to the Schedule 13D is hereby amended and restated as follows:
The following documents are filed as appendices and exhibits:
Appendix I: Transactions Effected During the Past Sixty Days
(previously filed)
Appendix II: Joint Filing Agreement (previously filed)
Exhibit A: Letter to the Board of Directors of PHH Corp dated April 30, 2007
(previously filed)
Exhibit B: Letter to the Board of Directors of PHH Corp dated June 20, 2007
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CUSIP No. 693320202 SCHEDULE 13D Page 5 of 5 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: June 20, 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
EXHIBIT B
LETTER TO THE BOARD OF DIRECTORS
Dear Members of the Board,
In our letter dated April 30, 2007, we laid out the rationale for
maximizing value for PHH shareholders through continued public ownership and a
business separation through a spin-off. We are disturbed by your failure to
address our proposal in any substance in your preliminary proxy statement (the
"Preliminary Proxy") filed on June 18, 2007. The actions described in the
Preliminary Proxy paint the picture of a seller in panic mode as bidders were
dropping out and even Blackstone blinked at the eleventh hour. Importantly, the
issues that caused this panic were either irrelevant (sub prime meltdown) or
self-inflicted and temporary (inability to produce financial statements, failure
to cut capacity heading into the declining mortgage market). It is clear that
you merely sought to do the best you could in a desperation auction of the
Company, without giving serious consideration as to whether the Company should
be sold in the first place. The lack of any convincing arguments against a
spin-off in the Preliminary Proxy reinforces our objection to the proposed sale.
In addition, we note that PHH's better than expected recent results and the
recent recovery in other mortgage related stocks should enhance the returns
associated with a rejection of the sale.
Incorporating the Company's recent results, we now estimate the value per
share that could be realized through continued public ownership at more than $51
per share within 2 years. Even in the short term, we believe that the separation
of the Fleet business from the Mortgage business through a spin-off would likely
result in an immediate value per share of at least $36, a vastly superior
outcome to the proposed sale at $31.50. A spin-off would likely avoid the
substantial tax leakage associated with a separation after a sale. Using the
deferred tax liability related to mortgage servicing rights as of December 31,
2006 as a crude estimate, we estimate the tax leakage in the proposed sale could
amount to $10 per share.
MATERIAL OMISSIONS IN THE PRELIMINARY PROXY
The Preliminary Proxy fails to address a number of key issues. Most
importantly, the fairness opinions ignore the possibility of continued public
ownership and a spin-off and fail to quantify the significant tax savings
associated with such an approach. Based on the timeline of events outlined in
the Proxy, you only hired investment bankers once the conduct of an auction was
practically a foregone conclusion. Instead, the mandate of the investment
bankers should have included an evaluation of a spin-off. While it appears that
management had some concern that a standalone mortgage business might not retain
investment grade credit ratings, the fairness opinions concede that PHH is
overcapitalized by assuming a $135m one-time dividend. We believe that a
standalone Mortgage business could easily retain an investment grade rating if
PHH shifted a larger portion of the unsecured debt to the Fleet business prior
to a spin-off. Our conversation with a leading credit rating agency has
reinforced our belief that this would allow both the Mortgage and the Fleet
business to retain investment grade ratings post-spin-off, and we are
disappointed that the Board has not put more effort into exploring this path. In
any event, we believe that a downgrade to below investment grade would be
manageable and likely temporary. It would be instructive for shareholders to
understand how much equity capital Blackstone intends to fund to operate the
Mortgage business after increasing the borrowing capacity of the Mortgage
business (including the unsecured debt) from $4.7 billion before the sale (as of
March 31, 2007) to $5.8 billion and contemplating the issue of another $300
million in public debt.
We are also disappointed to learn that the Preliminary Proxy does not break
out the purchase price allocation between the Fleet business and the Mortgage
business. We expect that such disclosure would highlight that the mortgage
assets are being sold at a significant discount to tangible book value. We find
it hard to understand why the Board would agree to this given the mortgage
assets' liquid nature and conservative valuation.
Furthermore, we note the failure to disclose in the Preliminary Proxy any
information regarding future employment of Terence Edwards, PHH's CEO, and other
members of management in the Mortgage business after the completion of the sale.
It is conceivable that Mr. Edwards has a strong incentive to help effect a sale
of the Mortgage business at a low valuation. This would be the case if there was
an implicit expectation that he will remain employed by the Mortgage business
with a generous new options package as is customary in private equity deals,
with strike prices at the low deal valuation.
Finally, we note the omission of any long-term financial projections or any
assessment of the Mortgage business' structural cost advantage or full potential
in a normalized mortgage environment beyond 2008. PHH's shareholders cannot make
an informed decision regarding a sale of the business without an understanding
of the longer term potential of the Company beyond the next six quarters. Of
your four valuation methodologies, only the Discounted Dividend Analysis is
based on the Company's longer term internal estimates. However, while the
analysis implies EPS of at least $6.00 in 2012 for the combined businesses, the
fairness opinions assign inexplicably low multiples to these earnings (e.g. 6.5x
to 7.5x for the Mortgage business before discounting). Hiding behind simplistic
fairness opinions by bankers, whose compensation is mostly dependent on a deal
going through, is irresponsible.
We demand that you correct the above omissions in your definitive proxy
statement. Shareholders will not be able to make an informed decision about the
pending sale unless a) the fairness opinions comprehensively evaluate the option
to remain public and pursue a spin-off, b) you quantify the tax leakage
associated with the proposed sale and break-up, c) you break out the after-tax
proceeds from the sale of the standalone mortgage business, d) you disclose
whether CEO Terence Edwards and other members of management have any agreements
or understandings, or are in negotiations with Blackstone regarding future
employment and equity participation, or whether such negotiations have been
precluded and e) your longer term internal projections are disclosed.
BETTER THAN EXPECTED RECENT RESULTS
We were encouraged by stronger than expected operating results disclosed in
the Company's recently filed 2006 Form 10-K and the release of operating metrics
for the first quarter of 2007. Fleet earnings before taxes in 2006 were $102
million, significantly better than the Company's previously communicated
expectation of $90 - $95 million. The 10-K did not break out any non-recurring
benefits in the Fleet business and we now assume the Company will grow revenues
and earnings before taxes at a mid single digit percentage rate starting from
this higher base in 2006. For 2007, this would translate into $105 - $110
million in earnings before taxes and $62 - $67 million in free cash flow after
cash taxes at 20% and a $20 - $22 million net investment to grow the fleet (at
constant 10x leverage). At a 15x to 17x multiple of 2007 free cash flow, the
Fleet business would be worth $17 to $20 per share today or $19 to $22 per share
in 2 years. Consistent with our previous methodology, this estimate still does
not reflect the synergies GE would likely reap.
The higher Fleet valuation implies a sale of the Mortgage business at
approximately 0.7x tangible book, an even more staggering discount than we
previously estimated. As a consequence, a spin-off of the mortgage business and
initial valuation at tangible book value would yield an immediate combined
valuation of approximately $36 per share. The same valuation could also be
realized in a liquidation of the Mortgage business at tangible book value. For
shareholders, both scenarios are vastly superior to a sale at $31.50. Clearly, a
Board acting in shareholders' interests would not agree to a sale at this price.
We believe the mortgage operation will re-emerge as a uniquely attractive
asset in one to two years. It represents the only private label outsourcing
option with scale for smaller mortgage originators and it has a structural cost
advantage rooted in the disintermediation of expensive loan officers. The
Company's recently reported results have been incrementally supportive of this
view. Adjusted for the unusual expenses associated with the restatement, 2006
mortgage results, while still depressed, were better than the Company's most
recent expectation. In addition, in the first quarter of 2007, total closings
actually increased year over year, despite continued declines in the market. We
expect that this is a reflection of the new private label partnerships and of
improved penetration of the real estate broker channel. Importantly, this growth
in volumes has been achieved with fewer staff. Finally, credit statistics for
the servicing portfolio such as 90 day delinquencies and foreclosures/real
estate owned/bankruptcies remained stable year over year at below industry
levels, a reflection of the Company's high quality mortgage mix, superior credit
underwriting and the absence of exotic mortgage products.
We continue to value the Mortgage business at $26 to $34 per share. As we
outlined in our previous letter, this valuation assumes an 8x to 10x multiple of
the combined production and servicing after-tax earnings, a 40 basis points
pre-tax profit margin on origination volumes of $45 - $50 billion and an 8 basis
points pre-tax profit margin on the Company's current $162 billion servicing
portfolio.
In total, if shareholders were allowed continued public ownership, we
believe they could realize $51 to $68 per share over two to three years,
comprised of $19 to $22 per share for the Fleet business, $26 to $34 for the
Mortgage business and $6 to $12 per share in cumulative earnings over the next
two to three years.
MORTGAGE STOCKS RECOVERY
We believe that if GE and Blackstone's bid is allowed to proceed,
shareholders would be deprived of a tremendous opportunity. We are disappointed
by the Board's decision to support such a course of action and we are
particularly disturbed by the Board's lack of long-term commitment to the
Company and its shareholders. When the proposed sale was announced on March 15,
the deal price represented a 13.3% premium to the $27.81 close on the previous
day, close to a four-plus month low. Since the announcement of the proposed
sale, mortgage-related stocks have started a significant recovery: A basket of
stocks comprised of Countrywide Financial, Washington Mutual, IndyMac Bancorp,
Freddie Mac and Fannie Mae has appreciated by an average of 14.7% since the
March 19 close (as of June 14 and including dividends), with returns ranging
from 6.7% to 29.6%. It is quite likely that if the Company's stock had been
allowed to appreciate in line with this group without a sale agreement, it would
already exceed the proposed deal price of $31.50.
SUMMARY
Simply doing the best you can in a desperation auction or a similar process
without sufficiently questioning the merits or the timing of a sale in the first
place does not constitute the proper exercise of fiduciary duty. We reiterate
our strong objection to a sale of the company. We note that the Preliminary
Proxy does not provide any compelling reasons as to why a spin-off would not be
the optimal way to proceed. We are encouraged by the accelerated profit growth
in the Fleet business and the improvements in the Mortgage business. We believe
that a rejection of the proposed transaction would allow shareholders to benefit
from a continuation of these trends and result in substantial rewards both
immediately and over a two to three year time frame. The recent recovery of
mortgage-related stocks likely limits the short-term risk associated with a
rejection of the take-over bid. In addition, a pursuit of a tax-free spin-off
should result in immediate appreciation of the Company's stock, as the
standalone mortgage company is unlikely to trade below book value. We demand
that you provide shareholders with the information required to understand such
alternatives to the proposed sale by filing a definitive proxy statement that
alleviates the gaping holes in the Preliminary Proxy statement.
Sincerely,
/s/ Alan P. Fournier
Alan P. Fournier
Managing Member
Pennant Capital Management, LLC