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H&R Block May Scrap Sale of Option
One Mortgage Unit (Update2)
By Yalman Onaran
H&R Block Inc., the biggest U.S. tax- preparation
company, may have to scrap the sale of its subprime mortgage
unit after losses more than doubled.
Cerberus Capital Management LP, which agreed in April
to purchase the entire Option One Mortgage Corp. subsidiary,
may buy just the loan-servicing business, Kansas City,
Missouri-based H&R Block said today in a statement.
``The loan-originations market is in the midst of the
most severe dislocation it has seen in years, maybe the
most severe since the 1930s,'' Chief Executive Officer
Mark Ernst, 49, said on a conference call with analysts.
He said the credit markets are in ``turmoil.''
Option One, which H&R Block bought in 1997, has
generated more than $1 billion in losses for H&R
Block in the past five quarters. The company today reported
a net loss of $302.6 million for the fiscal first quarter,
which ended July 31, and said Option One was responsible
for about two-thirds of the total.
Under the original terms of the sale, which earlier
this month was pushed back to December from October,
H&R Block has to keep the unit running with cash
infusions until the transaction closes. Investor demand
for bonds backed by mortgages has dried up as defaults
on subprime mortgages, made to the riskiest borrowers,
increased. The crisis has shut off access to cash for
companies such as Option One.
Fewer Loans
Ernst said Option One had cut lending by 80 percent
to about $200 million a month, compared with about $1
billion a month before the crisis. While that violates
the original sale agreement with Cerberus, H&R Block
prefers risking the sale rather than continuing to make
loans that investors don't want to buy, he said. If the
sale isn't completed, H&R Block will shut down the
business, Ernst said.
H&R Block fell 15 percent on the New York Stock
Exchange this year through yesterday as mortgage losses
offset income from the tax business and raised questions
about the company's ability to sell Option One. The shares
declined 28 cents, or 1.4 percent, to $19.22 in composite
trading at 10:06 a.m.
Renegotiating the sale accord ``could potentially accelerate
the disposition of Option One, which should instantly
improve'' H&R Block's share price, said Scott Schneeberger,
an analyst at CIBC World Markets Inc. in New York, in
an Aug. 28 report.
Cost of Closure
If the accord is amended, H&R Block may incur certain
costs to shut down parts of Option One, the company said,
without elaborating. If there's no agreement on modifications,
the original terms will remain in effect, H&R Block
said.
``While H&R Block hopes to conclude these negotiations
soon, the company cannot be sure that it will be able
to do so,'' H&R Block said.
Other possible outcomes include waiving a condition
that requires Option One to have $2 billion in loans
at closing and $8 billion of credit lines, H&R Block
said.
Discontinued operations, which include the mortgage
unit being sold, had a net loss of $192.8 million in
the first quarter, the company said. Option One, based
in Irvine, California, was the nation's eighth-biggest
seller last year of subprime mortgages. Such loans typically
default about six times more often than conventional
mortgages.
``Option One's bleeding won't stop until it's sold or
shut down,'' Schneeberger said in an interview this week.
``It would be better if they completed the sale urgently,
forgoing the expectation of receiving any money for it.''
Tax Unit
Losses excluding the mortgage unit were 34 cents a share,
in line with the 35-cent average of seven analyst estimates
compiled by Bloomberg. Revenue from continuing operations,
which excludes Option One, rose 11 percent to $381.2
million, the company said. The tax-services unit lost
$172.2 million in the quarter. H&R Block typically
loses money in the first half of its fiscal year before
the U.S. tax season starts.
Hedge fund manager Richard Breeden is running for the
H&R Block board, accusing management of failing to
do enough to reverse the share price decline. Board elections
will take place during the annual shareholders' meeting
next week.
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