H&R Block Sells Troubled Bad Credit Home Loan Lender
H&R Block Inc., the largest U.S. tax preparing company, said it found a buyer for its money-losing bad credit mortgage unit following a six-month search - and will sell it for 40 percent less than it sought.
Cerberus Capital Management LP, a New York-based manager of private equity and hedge funds, will pay up to $800 million for Option One Mortgage Corp., according to calculations by UBS AG analyst Kelly Flynn.
H&R Block today reduced the value of Option One’s tangible net assets, and said Cerberus would pay $300 million less than that amount.
The sale puts to rest concern that H&R Block Chief Executive Officer Mark Ernst wouldn’t be able find a buyer for Option One, the value of which plunged as defaults on bad credit mortgages rose to the highest level in four years.
Still, it leaves the company with about $500 million less than the $1.3 billion Ernst said he was seeking for its mortgage lender last month.
“What matters most is that it’s being sold,” said Scott Schneeberger, an analyst at CIBC World Markets Inc. in New York.
“The price isn’t clear and might change more, but they’re getting something for it. Just to make it go away is what investors really want the company to do at this point.”
The company will take a hit of as much as $320 million in the fourth quarter, which ends on April 30, to reflect the lower value of the assets. Yesterday H&R Block said the charges would cause a net loss for 2007.
Up to $152 million of the charge will be to reduce Option One’s goodwill, or the fair market value in excess of the original purchase price. That would leave some $170 million to be reduced from the net asset value of Option One, which was $1.27 billion as of January 31.
Based on the $170 million reduction to the mortgage company’s value and the $300 million discount provided to Cerberus, the purchase price would be about $800 million if the sale took place today.
CEO Ernst said he was satisfied with the price although it fell short of his original expectations.
“Given the recent and significant changes in the subprime (bad credit home loan) market, we’re pleased with the outcome,” Ernst said.
H&R Block bought Option One for $218 million in 1997 from Fleet Financial Group Inc., now a part of Bank of America Corp. As the U.S. housing market boomed and lending to subprime borrowers surged, the unit at its peak in 2004 provided as much as 58 percent of H&R Block’s pretax income.
Since its purchase, the mortgage company has contributed a total of $2.8 billion in pretax earnings, H&R Block said. Option One, based in Irvine, California, ranked eighth among U.S. issuers of subprime mortgages last year, according to the trade journal Inside Mortgage Finance.
In the first nine months of the current fiscal year, H&R Block has recorded losses of about $250 million linked to bad home loans made by Option One.
The Option One transaction is expected to be completed by October 31. The company said it will delay reporting fourth-quarter earnings until June 21 to incorporate charges.
The unit’s sale price will be a “moving target” as the value of subprime mortgage assets change, CIBC’s Schneeberger said. Other companies selling subprime units have had to accept reductions in price when their deals closed.
SOURCE: Bloomberg Media