Element Financial Corporation

TSX : EFN


Element Financial Corporation

June 02, 2014 16:49 ET

Element Signs Definitive Agreement to Acquire PHH's North American Fleet Management Business

Materially accretive transaction will rank Element as one of the leading equipment finance companies in North America

TORONTO, ONTARIO--(Marketwired - June 2, 2014) -

THIS NEWS RELEASE IS NOT FOR DISSEMINATION IN THE UNITED STATES OR TO ANY UNITED STATES NEWS SERVICES

  • Addition of more than US$4.6 billion of total assets, including more than US$4.0 billion of net investment in fleet leases
  • Total debt of US$3.5 billion to be assumed by Element, including existing Canadian and US securitization programs
  • More than 10 percent accretive to adjusted operating and cash EPS in 2015 and 2016
  • Element's cash tax payable deferred for more than 15 years
  • Tangible leverage expected to increase to approximately 4x at closing from 1.8x

Element Financial Corporation (TSX:EFN) ("Element" or the "Company"), one of North America's leading equipment finance companies, today announced that it has entered into a definitive agreement to acquire the assets and operations of PHH Arval, PHH Corporation's North American fleet management services business (the "Transaction"). Under the terms of the agreement, Element will pay approximately US$1.4 billion for the business in an all-cash transaction representing a purchase price multiple of 1.56 times the adjusted book value of the acquired business. At March 31, 2014, PHH Arval reported more than US$4.6 billion in total assets, of which US$4.0 billion represented net investment in fleet leases, and generated annual origination volumes of approximately US$1.7 billion during 2013.

"This transformative acquisition achieves all of the strategic and financial objectives that we established when we set out to expand our domestic fleet management business into the U.S. market," said Steven K. Hudson, Element's Chairman and Chief Executive Officer. "It provides us with a fully integrated North American fleet management offering that complements our other three business verticals at the same time that it is accretive to our shareholders and immediately improves our capital efficiency," added Mr. Hudson.

On a pro forma basis giving effect to the Transaction, Element will have combined total assets of approximately $10 billion. The acquisition of PHH Arval is expected to be more than 10 percent accretive to Element's shareholders in 2015 and 2016 on an adjusted operating and cash EPS basis and is expected to increase Element's balance sheet leverage to approximately four to one on closing.

"PHH Arval's service culture is renowned in the North American fleet management industry and we are very excited about the opportunities that we see emerging from combining their operations with Element's existing domestic fleet management business," said Bradley Nullmeyer, Element's North American President. "We also see exceptional growth opportunities for the combined business by being able to offer a North American-wide fleet management solution to customers that we service in our other business segments," added Mr. Nullmeyer.

"This acquisition, and the concurrent expanded funding arrangements that we have put in place, will transform both sides of our balance sheet resulting in improved economics for each of our business lines going forward," noted Michel Beland, Element's Chief Financial Officer. "In addition, the transaction provides Element with an additional US$600 million of tax deferrals which will push out the expected time horizon for the payment of cash taxes to more than 15 years," added Mr. Beland.

As part of the Transaction, Element will acquire the employees, systems, intellectual property, operations, offices, agreements and other assets that PHH Arval currently employs to service its North American fleet customers.

A Transition Services Agreement between Element and PHH Corporation, under which PHH Corporation and Element will continue to provide various services to each other during the transition period, will ensure that service to those customers, suppliers and employees will not be disrupted in any way following the closing of the transaction.

The Transaction, which is expected to close on or before July 31, 2014, is subject to customary closing conditions, including regulatory approvals, and post-closing purchase price adjustments.

Transaction Funding

To finance the Transaction, Element has obtained a commitment letter for a syndicated secured bridge non-revolving credit facility of up to USD$1.36 billion pursuant to a non-revolving bridge credit agreement between Element as borrower, the financial institutions identified therein as lenders and Bank of Montreal as agent (the "Bridge Agreement"). Element also announced plans to sell on a "bought deal" basis $750 million of subscription receipts, $250 million of extendible convertible unsecured subordinated debentures and $100 million of perpetual preferred shares (the "Offerings"), see Element's news release dated June 2, 2014 entitled "Element to Raise $1.1 billion of New Capital in Conjunction with Acquisition of PHH Corporation's North American Fleet Management Business". The completion of the Offerings is expected to result in a reduction in amounts required under the Bridge Agreement to finance the Transaction. Element's senior management team, together with the members of its board of directors, is purchasing more than $10 million worth of shares on the Offerings. To fund the expected continued growth of each of its four North American equipment finance verticals, as part of this transaction, Element has negotiated an expanded and improved senior credit facility in the amount of approximately $1.5 billion that enables access to additional U.S. term liquidity and improved net interest margins.

Transaction Advisors

Guggenheim Securities, LLC and BMO Capital Markets acted as financial advisors to Element in connection with the Transaction. Blake, Cassels and Graydon and Cravath, Swaine and Moore acted as legal counsel to Element.

About Element Financial Corporation

With total assets in excess of $4.2 billion, Element Financial Corporation is one of North America's leading equipment finance companies. Element operates across North America in four verticals of the equipment finance market - Commercial & Vendor Finance, Aviation Finance, Railcar Finance and Fleet Management

This release includes forward-looking statements regarding Element and its business. Such statements are based on the current expectations and views of future events of Element's management. In some cases the forward-looking statements can be identified by words or phrases such as "may", "will", "expect", "plan", "anticipate", "intend", "potential", "estimate", "believe" or the negative of these terms, or other similar expressions intended to identify forward-looking statements.. Forward-looking statements in this release include those related to the financing and closing of the Transaction and the anticipated benefits of the Transaction. The forward-looking events and circumstances discussed in this release may not occur and could differ materially as a result of known and unknown risk factors and uncertainties affecting Element, including risks regarding the equipment finance industry, economic factors, risks related to completion of the proposed purchases of portfolios of finance assets, and many other factors beyond the control of Element. No forward-looking statement can be guaranteed. Forward-looking statements and information by their nature are based on assumptions and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statement or information. Accordingly, readers should not place undue reliance on any forward-looking statements or information. A discussion of the material risks and assumptions associated with this outlook can be found in Element's 2013 MD&A, and 2013 Annual Information Form, all of which have been filed on SEDAR and can be accessed at www.sedar.com. Accordingly, readers should not place undue reliance on any forward-looking statements or information. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and Element undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

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