H&R Block: Subprime Salvage

Cerberus joins the low-end loan chase with a bailout deal.
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H&R Block

(HRB) - Get Report

agreed to sell its struggling subprime mortgage business, Option One Mortgage, to private-equity giant Cerberus Capital Management.

Terms haven't been fully set. Cerberus will pay "the value of tangible net assets of the business" at closing, minus $300 million. H&R Block said it has the right to sell certain Option One assets before closing, expected in the quarter ending in October.

"Given that provision and changing market conditions," the company said, "the tangible net asset value at closing will be different than it was at Jan. 31."

Specifically, it will likely be substantially lower, given the steep decline this spring in the business of lending to homebuyers with spotty credit histories. At Jan. 31, the tangible net assets of Option One were $1.27 billion.

But credit quality in the nonprime mortgage business has plunged this year, putting some 50 lenders out of business, according to

Bloomberg

, and forcing onetime highflier

New Century

(NEWC)

into bankruptcy. Wall Street has been skeptical that H&R Block would get anything for Option One.

H&R Block put Option One up for sale in November, saying it hoped to get $1.3 billion for the unit. The company said as recently as a month ago that it still hoped to get that much. But H&R conceded in late March that it wouldn't be able to close a deal by its March 31 target.

Cerberus becomes the latest private investment player to make a big plunge into subprime. Hedge fund Farallon bailed out

Accredited Home Lenders

(LEND) - Get Report

earlier this spring and also made a move into manufactured housing.

The deal excludes H&R Block's retail lending business, H&R Block Mortgage. The company told

TheStreet.com

in March that it was discontinuing parts of its retail mortgage business.

The company anticipates taking a noncash pretax impairment charge in the range of $290 million to $320 million during its fiscal fourth quarter. H&R Block's fourth quarter ends April 30.

H&R Block may also receive an additional cash payment in the form of an earnout, it says. The earnout arrangement allows the company to receive "one-half of Option One's cumulative net income" up to $300 million from loan originations for the 18 months following the closing of the deal.

The company anticipates a net loss for fiscal 2007 as a result of the impairment charge. H&R Block reiterated that excluding its mortgage business -- which includes Option One and its retail mortgage division -- earnings should be $1.15 to $1.25 a share.

Shares jumped $1.67 or 7.6% to $23.50 early Friday.