Cerberus buys US sub-prime business(2)

US investment group Cerberus has bought H&R Block’s struggling sub-prime mortgage lender Option One for about $800 million.

US alternative asset manager Cerberus has agreed to buy Option One, the loss-making home-loan unit of US tax firm H&R Block, for a reported $800 million ($662 million).

Cerberus will pay $300 million less than the value of Option One’s assets, H&R said today. The discount reflects the troubled state of the US sub-prime lending market, where default rates are increasing rapidly.

The final value of the deal will only be set when the deal completes in October this year. H&R estimated the total value of assets to be $1.27 billion on January 31, but it revised this downwards today. Analysts now estimate the current value at about $1.1 billion, according to Bloomberg, putting a price tag of $800 million on the company.

H&R Block has also agreed an earn-out arrangement in which it will receive half of Option One’s net income from its loan origination business for the 18 months after the deal completes. This could earn the group up to $300 million on top of the sale price, depending on performance.

Some analysts believe Cerberus is over-paying for the mortgage company. One UBS analyst, Kelly Flynn, told Bloomberg she had expected Option One to go for as little as $400 million.

But a source close to Cerberus said: “Cerberus is known for its due diligence and they wouldn’t invest in a business if they didn’t see value in it. Potential synergies may be available to increase the value of the company.”

Cerberus is a specialist distressed debt investor, targeting companies in financial difficulties. It has around $23.5 billion under management in funds and accounts.