H&R Block announced today that it reached a definitive agreement to sell off the servicing unit of its now defunct mortgage lender Option One to WL Ross & Co. LLC.
The sale is expected to generate proceeds of roughly $1.1 billion for Block and based on January 31 values, reduce debt by approximately $700 million and return another $270 million in cash.
Per the agreement, both parties will be freed from any obligations if the deal fails to close by May 30, although Ross will need to pay a reverse breakup fee if his side is unable to satisfy financing conditions by that time.
And in the event that 30+ day delinquencies of mortgage loans serviced by the servicing business as of the closing date exceed a specific threshold, a purchase price deduction would occur.
“In today’s turbulent markets, the challenge is to complete a transaction, not simply announce an agreement. We have reached what we consider to be a good agreement with WL Ross & Co., whose reputation for completing transactions is excellent,” said Richard C. Breeden, Chairman of H&R Block.
“However, there is still much work to be done until the business is safely transferred at closing.” Mr. Breeden added “We believe that this servicing business can best be carried out by an organization like WL Ross & Co. that is committed to continuing and growing the business. At the same time, completing this transaction will allow our company to be more squarely focused on what we’ve done best since 1955 – preparing America’s taxes.”
Breeden knows this all too well, after Option One’s proposed sale to Cerberus Capital fell through in December, leading to the subprime mortgage originator’s demise and the loss of more than 600 jobs.
Late last year, Ross acquired the servicing rights of $42 billion in mortgages from American Home Mortgage, seeing the business as a bright spot in an otherwise dreary industry.
According to the AP, this transaction will create the country’s second-largest subprime servicing portfolio after Countrywide, with roughly $53 billion in loans coming from Option One.
Ross has agreed to offer job positions with comparable terms to a “substantial number” of those currently employed in Option One’s servicing business.
Shares of H&R Block were up 24 cents, or 1.37%, to $17.71 in early afternoon trading on Wall Street.