H&R Block to sell subprime unit

By Dan Wilchins

NEW YORK (Reuters) - H&R Block Inc. (HRB.N: Quote, Profile, Research, Stock Buzz) said on Friday it will sell its subprime lender Option One Mortgage Corp. to private equity firm Cerberus Capital Management LP, sending the tax preparer's shares up as much as 8.2 percent.

The sale price depends on the value of the mortgage assets when the sale closes, but will likely be below $1 billion, and perhaps as low as $700 million or $800 million, said Alex Paris, analyst at Barrington Research in Chicago.

The sale will allow H&R Block to exit the stormy subprime mortgage sector, which has been battered by high defaults among less credit-worthy home buyers, and focus instead on its main businesses, including preparing taxes for individuals and providing accounting services for companies.

"H&R Block will report much cleaner results now, and they can focus on their main business, but you almost regret them selling a business at the peak of a panic, because they may be selling at a bargain rate," said Thomas Russo, who manages more than $3 billion at Gardner Russo & Gardner, which owns H&R Block shares.

H&R Block bought Option One from the former Fleet Financial Group, now part of Bank of America Corp. (BAC.N: Quote, Profile, Research, Stock Buzz) in 1997 for $190 million in cash.

H&R Block looked at selling the Option One business in 1999, but wasn't satisfied with the price the asset could fetch. Since then, the subprime mortgage lender has generated more than $2 billion in pre-tax earnings.

For Cerberus, which made its name as a distressed asset buyer and has grown to become one of the largest fund traders and buyout firms in the world, the deal represents a latest bet on consumer finance after it led a consortium buying 51 percent of General Motors Corp.'s (GM.N: Quote, Profile, Research, Stock Buzz) financing arm GMAC.

GMAC also owns a mortgage finance company which has felt pressure from subprime lending woes.