H&R Block said on Tuesday it is shutting down Option One Mortgage's lending business and slashing 620 jobs, as its sale of the struggling subprime mortgage unit to Cerberus Capital Management has fallen through.
H&R Block shares , which were down 7.5 percent to $18 in pre-market trade, gained slightly to narrow losses in Monday trade on the New York Stock Exchange.
The moves, which will trigger about $200 million in charges and write-downs, come as the business of making home loans for riskier borrowers continues to deteriorate.
Block, the largest U.S. income-tax preparation company, in a regulatory filing said the deal was terminated because closing conditions could not be met and the two sides could not agree on new terms. Cerberus
Shutting down Option One's lending business will generate about $75 million in pretax charges, $34 million of which will be recorded against results for the second quarter ended October 31. Block also expects a write-down of as much as $125 million to reflect the lower value of the loan servicing business, which is up for sale.
Analysts said the termination of the Cerberus deal was widely expected and put an end to a painful chapter.
"It's not a good thing. There's charges and losses, but it might be making the best out of a bad situation," said Alexander Paris, an analyst at Barrington Research in Chicago.
Overall, more than 100 lenders have been forced to shut down or find buyers this year as housing prices have slumped. The meltdown has inflicted damage to hedge funds and cost several bank chief executives their jobs.
End Of An Era
Block, which has sought acquisitions that would complement its tax business, bought the Irvine, Calif. lender from Fleet Financial Group for $190 million in 1997. Fleet is now owned by Bank of America.
The company tried to sell Option One in 1999, when markets were stung by the 1998 Asian debt crisis, but it removed the for-sale sign when offers proved too low. Option One rode the mortgage lending boom and generated more than $2 billion of pretax earnings for Block between 1997 and 2006.
But investors recently urged Block to exit the mortgage business, prone to cyclical ups and downs, and focus on its tax business. In the past year, Option One reported about $1 billion of losses as mortgage markets declined.
By November last year, Block said it was considering the sale of Option One. Mark Ernst, then Block's chief executive, told investors a deal could reach as high as $1.3 billion.
But U.S. mortgage markets deteriorated rapidly, forcing down the price of other mortgage operations that were for sale.
In April Block agreed to sell Option One to Cerberus, a private equity and hedge fund firm, for a price to be based on the value of the unit's assets on the closing date. At the time, analysts said the unit would fetch about $700 million.
Yet the slowdown in U.S. housing sales continued, raising doubts that a deal would be completed at any price.
The company made $11.2 billion of subprime loans from January to September, ranking sixth nationwide, but more than half of them were booked in the first quarter.
"Most analysts, like myself, ascribed zero value to Option One," said Barrington's Paris, who cautioned investors early on that the mortgage business was under pressure. "To close the books on this whole miserable episode is a net positive."
Paris rates Block's stock "market perform" and estimates the company's other businesses are worth $22 a share to $24 a share.
The deal's demise comes two weeks after former U.S. Securities and Exchange Commission Chairman Richard Breeden was named Block's chairman. Breeden, who now runs an activist investment fund, had campaigned to win seats on Block's board.
He argued that former CEO Ernst had hurt the company by failing to sell the mortgage unit sooner.
Block's board ousted Ernst on November 20 and replaced him with Alan Bennett, a retired Aetna
"The mortgage market today has undergone vast changes since last April, when the original Cerberus deal was signed," Breeden said in a statement. "We could not find a way to restructure the original transaction to mutual satisfaction."
Breeden said Block will continue to seek a sale of Option One's servicing business.
The broken deal marks the second time in a month that a Cerberus deal has fallen through. Cerberus in November pulled out of its $4 billion offer to buy equipment rental company United Rentals. United Rentals has filed suit.
Meanwhile GMAC, the giant auto finance firm majority owned by Cerberus, has also been hard hit by the subprime crisis. GMAC and Cerberus are under pressure to provide at least $1 billion of new capital for GMAC's Residential Capital unit, the No. 2 independent U.S. mortgage lender.