Blackstone financing failure ends PHH deal, signals problems for private equity shops

By Evan Weinberger

New York, Jan. 2 - While market watchers recovered from New Year's celebrations Tuesday, the Blackstone Group and General Electric Capital Corp. recovered from a punch.

PHH Corp., a Mt. Laurel, N.J.-based mortgage and vehicle fleet management services provider, broke off the two-part $1.8 billion merger with GE Capital because a Blackstone affiliate was unable to come up with the funds to purchase PHH's mortgage lending unit.

Now PHH wants the $50 million break-up fee from Blackstone that the companies agreed to when the deal was announced in March.

Under the deal, PHH was to merge with General Electric's financial unit. GE was then set to sell the mortgage unit to Pearl Mortgage Acquisition 2 LLC, the Blackstone unit, while holding on to the vehicle fleet management services business.

But Blackstone was unable to come up with the cash from banks to complete the deal. Blackstone, which went public in June, said in September it was having trouble coming up with up to $750 million in financing for the deal. The buyout shop was reportedly having trouble convincing banks of PHH's value as the subprime mortgage crisis deepened.

The deal had a completion deadline of Dec. 31. When that didn't happen, PHH pulled the plug.

"I am disappointed that we could not conclude the transactions contemplated by the merger agreement," A. B. Krongard, non-executive chairman of the board of PHH, said in a statement Tuesday. "The board will determine in due course whether to continue to explore the company's strategic alternatives. The board remains focused and committed to delivering value for our stockholders regardless of the decision."

While this is yet another setback for Blackstone - fund-raising troubles have reportedly stalled Freedom Communications Inc.'s bid to buy itself back from Blackstone and Providence Equity Partners because they doubt the value of the newspaper publisher - the PHH deal also raises questions about the future of leveraged buyouts.

Sovereign wealth funds representing foreign governments in East Asia and the Middle East have taken the lead in bailing out troubled financial firms in recent months. That's a trend market watchers expect to continue in 2008.

"They are not the driving force anymore," one market watcher said of the private equity shops. "The state run funds - loaded with U.S. dollars from oil sales" are "the capital in the driver's seat."

Stock in all three of the principals in the PHH saga sagged Wednesday, the first trading day of 2008.

PHH (NYSE: PHH) fell 54 cents, or 3.06%, to close at $17.10.

New York-based Blackstone (NYSE: BX) fell 39 cents, or 1.76%, to close at $21.74.

And New York-based GE (NYSE: GE) closed at $36.76, a fall of 31 cents, or 0.84%.

Markets walloped on return

Those stocks weren't the only ones falling on the day, as stock markets woke up with a 2007 hangover Wednesday.

Oil prices crossing the $100-per-barrel threshold and unexpectedly soft December manufacturing numbers sent investors scrambling when they came back from their revelry. Those factors did nothing to allay the recession fears that closed out 2007.

The Dow Jones Industrial Average tumbled 220.86 points, or 1.67%, to close at 13,043.96.

The Nasdaq dropped 42.65 points, or 1.61%, for a 2,609.63 close.

And the Standard & Poor's 500 fell 21.20 points, or 1.44%, for a 1,447.16 close.

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