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PE Buyers Likely to Look at Purer-play H&R Block

NEW YORK ( The Deal) -- Now that H&R Block (HRB - Get Report) has sold its bank, the tax preparer could be an attractive private equity takeover target, according to some industry experts.

"H&R Block is a classic PE target," said analyst Sandy Mehta at Value Investment Principles Ltd. "There's value there waiting to be unlocked."

H&R Block on April 10 said it struck a deal with San Diego-based BofI Holding Inc. subsidiary BofI Federal Bank on the sale of H&R Block Bank for an undisclosed amount. Kansas City, Mo.-based H&R Block put its banking unit on the block on Oct. 10, 2012.

"Selling the bank definitely makes a takeover [of H&R Block] very plausible," said one industry source who asked to remain unnamed.

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"This makes H&R a pure-play business, only adding to the possibility of a takeover," Value Investment's Mehta said.

H&R has an established brand name, a widespread branch network and predictable earnings, all of which makes it "extremely attractive" to PE firms, he asserted.

PE firms such as Omaha-based Berkshire Hathaway Inc. and Chicago-based Thoma Bravo LLC "look for exactly these qualities in the businesses they acquire," Mehta explained.

Berkshire Hathaway and Thoma Bravo officials didn't return calls.

H&R Block doesn't appear to hold the same attractiveness for a strategic buyer, however.

For instance, Intuit (INTU - Get Report) online tax-preparation service provider,, H&R's top rival, wouldn't want to purchase the business.

"[H&R Block] is at the other end of the market spectrum," said Morningstar Inc. analyst Andrew Lange, who covers Intuit, which caters to online users while Block specializes in in-person tax preparation.

Mountain View, Calif.-based Intuit provides online small-businesses accounting, payment processing and tax preparation services. Its brands include TurboTax, QuickBooks, Quicken,, Demandforce, ProSeries and Lacerte.

Intuit, too, has been streamlining operations in an attempt to focus on small-businesses accounting and tax preparation services. It sold its financial services division to Thoma Bravo in a $1.025 billion all-cash transaction on July 1.

Intuit wants to expand, but mainly in the cloud-offering space, Lange said.

"The way [Intuit] sees it, the Internet space is much more attractive, since more people prefer the ease and convenience of the Internet as opposed to the old-style, brick-and-mortar ways [like H&R]."

Intuit officials didn't respond to calls.

H&R Block spokesman Gene King declined to comment on "rumors or analyst speculation. Right now the main focus is closing the bank deal ... hopefully before the beginning of next tax season."

Shopping H&R Block Bank was a direct result of the Dodd-Frank Act, which would have classified the company as a savings-and-loan holding entity, requiring it to incur additional expense and regulatory hassle, had H&R Block kept the bank.

"The proposed rules would require us to hold significant levels of additional capital, which does not properly align with our capital-lite business model," H&R Block CFO Greg Macfarlane said in a statement on Oct. 10, 2012.

Upon agreeing to a sale, H&R Block CEO William Cobb on April 10 said, in a statement, that "this is an important step in ceasing to be regulated as a savings-and-loan holding company, which we believe is in the best strategic interests of our company and our shareholders."

Goldman, Sachs & Co. and First Annapolis Consulting Inc. served as financial advisers to H&R Block on the H&R Block Bank deal, with Stinson Leonard Street LLP and Covington & Burling LLP providing legal counsel. BofI didn't name advisers.

Before BofI agreed to buy it, H&R Block Bank had been the subject of one failed attempt. Louisville, Ky.-based Republic Bank & Trust Co. had arranged to buy it for an undisclosed amount on July 11, but the buyer failed to receive regulatory approval. It was then that H&R Block and its financial adviser on the auction, Goldman Sachs, resumed the search for another buyer.

H&R Block trades on the New York Stock Exchange under the ticker symbol HRB, with a market capitalization of $7.75 billion. On Thursday, its stock closed at $28.20, down 0.46%.

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