Why PHH Corporation Stock Surged on Wednesday

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What happened

Shares of PHH Corporation (NYSE: PHH) are up about 26% as of 2:30 p.m. EST, after the company agreed to be acquired by Ocwen Financial Corp (NYSE: OCN) in an all-cash transaction. Ocwen shares are also up about 6% for the day on news of the acquisition.

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So what

Under the terms of the deal, PHH Corporation shareholders will receive $11.00 in cash for every PHH share they own, a 24% premium to closing price on Feb. 26.

In prepared remarks during its conference call, PHH Corporation said that after adjusting for restructuring charges and operating losses, the price implies a valuation of approximately 85% of PHH's adjusted book value. PHH Corporation reported that tangible book value stood at $16.99 per share at the end of the fourth quarter.

Ocwen shareholders seem to believe they're getting a bargain price, as that company's shares rose 6% today. For its part, Ocwen said in a presentation that the deal should lead to cost savings through scale. Its servicing portfolio will grow to $328 billion of unpaid principal balance as a result of the combination, up from $179 billion at the end of the fourth quarter. Ocwen said it anticipates cutting $50 million or more in annual overhead beginning in 2019.

Ocwen isn't ponying up much of its own cash to acquire PHH. It detailed in a presentation that it would contribute only about $74 million in cash to finance the transaction, relying on $260 million of cash on PHH's balance sheet, and $50 million of financing against PHH's assets, to do much of the heavy lifting.

Now what

The deal is slated to close in the second half of 2018, pending regulatory and shareholder approval. At a recent price of $10.68 per share, PHH Corporation is trading at a price that implies little risk the deal will fall through.

A higher bid appears equally unlikely, however. Under terms of the merger agreement, PHH Corporation would have to pay a hefty termination fee of $12.6 million, or roughly $0.39 per PHH share, if it accepts a superior proposal. Thus, as a result of the termination fee, a competing bidder would have to offer more than $11.39 per share to offer a better deal for PHH shareholders.

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Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool recommends Ocwen Financial. The Motley Fool has a disclosure policy.