Cerberus abandons $800m mortgage deal

Cerberus Capital Management has walked away from its third deal in 30 days.

Cerberus Capital Management has walked away from another previously agreed buyout, this time dropping its $800 million (€542 million) deal for H&R Block division Option One Mortgage Corporation. US tax firm H&R Block said in a statement that the two parties were unable to “identify mutually acceptable alternatives for restructuring the April agreement”.

When the acquisition was agreed both parties agreed to delay setting a price for the loss-making mortgage unit until the deal’s close in October, when Cerberus would pay $300 million less than the value of Option One’s assets. In April, analysts estimated that the price of the deal would be roughly $800 million. One UBS analyst, Kelly Flynn, told Bloomberg at the time that she believed Cerberus was overpaying for the unit, which she had expected to go for as little as $400 million.

As the subprime mortgage crisis deepened in the months following the initial deal, Cerberus and H&R Block were unable to agree on the final terms of the transaction.

“The mortgage market today has undergone vast changes since last April when the original Cerberus deal was signed,” H&R Block chairman Richard Breeden said in a statement. “Despite the hard work and good faith of both sides we could not find a way to restructure the original transaction to mutual satisfaction.”

Option One said it would cease loan originations effective immediately, in addition to laying off 620 employees and closing three offices. The unit will incur a $75 million restructuring charge.

Cerberus ran into trouble through its investment in another subprime mortgage originator: In August its portfolio company Aegis Mortgage Corporation filed for bankruptcy, revealing that it owed its private equity sponsor $178 million of unsecured, subordinated debt.

Though many private equity firms have terminated megadeals in recent months, including JC Flowers, Kohlberg Kravis Roberts and Silver Lake Partners, Cerberus has walked away from more agreements than its peers. The firm has axed three deals in just over 30 days.

Earlier this month Cerberus said it would not proceed with its $6.6 billion buyout of United Rentals, offering to pay the $100 million break-up fee or renegotiate the deal’s financial terms. And in late October, the firm dropped its $6.2 billion bid for IT outsourcing company Affiliated Computer Services. In both cases Cerberus cited poor conditions in the debt financing markets.