Blackstone Could Back Out Of PHH Deal

by Stewart Douglas

Story link: Blackstone Could Back Out Of PHH Deal

The reputable equity outfit Blackstone Group could be close to calling time on its agreement to purchase US lender PHH in spite of its longstanding reputation for never backing down from an acquisition according to reported in US media today.

The prospective bid by the equity group and the investment division of General Electric would see them acquire the business of lender PHH in a joint move that is thought to be worth just under $2 billion.

Mortgage lender PHH has suffered a significant downturn in the value of its mortgage business as a result of heightened risk from within the sub-prime sector.  Whilst it is of course not directly involved in the sub-prime market, and holds no sub-prime mortgages on its books, it has had to withstand the fallout from the mortgage sector in terms of the value of its loan assets.

As a result the company proposed there may be a deficit in value as compared to finance provided by banking consortia from the US and further afield to the tune of $750 million, having a significant and material impact on any potential deal.

Should Blackstone pull out, it will be liable to the tune of $50 million in cancellation penalties written in to the contract, on the assumption that it cannot directly attribute any causal link between the loss in value to PPH, which analysts have already stated as being unlikely.

Additionally there is a possibility that the value of the PHH mortgage portfolio could increase depending on the fluctuations in the market over the near future, which could ultimately help recoup the deficit reported by the lender in the run up to the deal.

It remains to be seen whether as a term material to the contract Blackstone would have sufficient legal standing to strike down the deal without incurring the relevant penalties, or whether it will attempt to ride the storm with the mortgage book valuation.