H&R Block to Sell Option One to Cerberus; Expects Full-Year Loss in 2007

H&R Block Inc. (NYSE:HRB) announced Friday that it will sell Option One to an affiliate of Cerberus Capital Management, L.P., a well-known private investment firm with numerous existing investments elsewhere in the mortgage industry, in a deal currently worth an estimated $970 million.

The transaction excludes Option One subsidiary H&R Block Mortgage Corp., and H&R Block said that it will cease operations at its direct lending subsidiary as a result.

The tax services provider also said that it expects to report an annual loss for its 2007 fiscal year as a result of roughly $350 million in charges associated with the sale of Option One and the exit of H&R Block Mortgage.

According to the terms of the agreement with Cerberus, the full value of the Option One deal will not be known until closing, which is expected during H&R Block’s fiscal second quarter ending Oct. 31, 2007. The company hinted that the final value of the deal will be significantly below the $1.3 market value currently assigned to the Option One business.

H&R Block also said that it has the right to sell certain Option One assets before closing, although it did not specify which assets might be sold off prior to the Cerberus deal. Sources have suggested to HW that the company might shop for a more profitable deal for its residual and whole loan portfolio holdings.

As part of the deal, H&R Block will also receive one-half of Option One’s cumulative net income from its loan origination business, for the 18 months following the closing, up to a maximum payment of $300 million but not less than zero.

“Option One has developed into a leading provider of mortgage services for Americans whose financial needs have not been served by traditional lenders,� said Mark A. Ernst, chairman and chief executive officer.

“With the changes occurring and being discussed for the U.S. mortgage industry, Option One will be positioned to more effectively compete, while allowing H&R Block to focus on growing its core tax, accounting and aligned financial services businesses.�

Buyer Grows Mortgage Portfolio
Cerberus’ latest purchase adds to the private equity giant’s growing stake in the mortgage banking industry.

The company is perhaps best known for its buyout of a controlling stake in GMAC in late 2006, in a much-ballyhooed deal worth an estimated $14 billion that saw Cerberus best traditional powerhouse KKR in a bidding war for the former financing arm of General Motors.

The private equity firm also owns a controlling stake in Houston-based subprime lender Aegis Mortgage, as well as St. Paul, Minn.-based Green Tree, a manufactured home and home equity loan servicer.

In Spite of Sale, Losses Continue to Mount
In connection with the sale, the company said it expects to incur a non-cash pretax charge for impairment of its investment in Option One of approximately $290 million to $320 million, to be recorded in its fiscal 2007 fourth quarter.

The shutdown of H&R Block Mortgage will also result in pretax charges for severance, facilities closure and other costs of approximately $25 million, the company said. In addition, H&R Block expects to record a non-cash pretax charge of approximately $16 million in connection with the impairment of H&R Block Mortgage goodwill.

As a result of these impairment and related charges, H&R Block said it expects to report a net loss for the company’s fiscal 2007 on a fully reported basis, although it declined to provide any further estimates beyond the general earnings guidance.