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 L.P., sending the tax preparer's shares up nearly 9 percent.

The final price H&R Block will receive for Option One, which has been buffeted by a crisis sweeping providers of mortgages to less credit-worthy home buyers, remained unclear.

It will depend on the value of Option One's tangible net assets when the deal closes, expected to happen in H&R Block's quarter ended October 31. Cerberus will pay the value of those assets -- $1.27 billion as of January 31 -- less $300 million, H&R Block said.

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

The deal allows H&R Block, which also said it is closing the unit's H&R Block Mortgage Corp., to exit the subprime loan arena, which is in crises amid rising defaults among less credit-worthy home buyers.

H&R Block shares were up 8.7 percent at $23.70 in electronic pre-market trading.

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.

H&R had said in January it hoped to get at least $1.3 billion for Option One, which it sold as part of a plan to refocus on its core tax preparation business.

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

In addition to the cash purchase price, H&R Block may also receive an additional earnout cash payment, contingent on Option One's future profit from mortgage originations.

The earnout arrangement allows H&R Block to receive half of Option One's cumulative net income from its loan origination business, for the 18 months following the closing, up to a maximum of $300 million.

The closure of Option One's loan originator unit H&R Block Mortgage will also result in pretax severance, facilities closure and other charges of about $25 million, and an additional noncash pretax goodwill impairment charge of about $16 million.

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. On a net basis, it expects to post a full-year 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.

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