H&R Block to sell subprime unit

NEW YORK (Reuters) - H&R Block Inc. (HRB.N) 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) 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 financing arm GMAC.

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

In early afternoon trading, H&R Block shares were up 3.8 percent to $22.66.

The company's shares trade at about 13.8 times expected 2008 earnings. That multiple could expand as the company's results improve, said Gardner Russo & Gardner's Russo.

BOOK VALUE

H&R had said in January it hoped to get at least book value for Option One. At that time, Option One's book value was $1.3 billion.

The final price H&R Block will receive for Option One, depends on the value of Option One's tangible net assets when the deal closes, expected to happen by October 31.

Cerberus will pay the value of those assets -- $1.27 billion as of January 31 -- less $300 million, H&R Block said. Tangible net book value will likely be lower than the January level when the deal closes, analysts said.

But H&R Block can receive up to another $300 million over the next 18 months from the sale. The tax preparer is entitled to half of Option One's cumulative net income from its loan making business, up to $300 million.

H&R Block will also have the option of selling some Option One assets before the deal closes.

The Kansas City, Missouri-based company will take a noncash pretax impairment charge of about $290 million to $320 million in its fiscal 2007 fourth quarter, which ends in April.

Option One mainly made mortgages via brokers, but H&R Block will also close H&R Block Mortgage, a unit that made subprime loans directly to consumers. That closure will result in costs of about $25 million, and a noncash pretax goodwill impairment charge of about $16 million.

H&R Block will continue making prime mortgage loans through its H&R Block Bank unit.

H&R reiterated its forecast for operating profit of $1.15 to $1.25 per share excluding the impact of the mortgage operations and related charges. It expects to post a full-year net loss.

As a result of the charges and conditions in the subprime mortgage industry, the company expects to delay filing its fourth-quarter and full year results until June 21.

H&R Block said it was advised by Goldman Sachs & Co. (GS.N) on the deal.

(Additional reporting by Anup Roy in Bangalore and Christian Plumb in New York)