April 20 (Bloomberg) -- H&R Block Inc., the largest U.S. tax preparer, said it found a buyer for its money-losing subprime mortgage unit after a six-month search and will sell the business for about 40 percent less than it sought.

Cerberus Capital Management LP, a New York-based manager of private equity and hedge funds, will pay as much as $800 million for Option One Mortgage Corp., according to calculations by UBS AG analyst Kelly Flynn. H&R Block today reduced the value of Option One's tangible net assets, a measure of the unit's liquidation value, and said Cerberus would pay $300 million less than that amount.

The sale puts to rest concern that H&R Block Chief Executive Officer Mark Ernst wouldn't be able find a buyer for Option One, whose value plunged as defaults on subprime mortgages rose to the highest level in four years. Still, it leaves the company with about $500 million less than the $1.3 billion Ernst said he was seeking for Option One last month.

``What matters most is that it's being sold,'' said Scott Schneeberger, an analyst at CIBC World Markets Inc. in New York who has a ``sector perform'' rating on the stock. ``The price isn't clear and might change more, but it looks like they're getting something for it. Just to make it go away is what investors really want the company to do at this point.''

Shares of H&R Block jumped 73 cents, or 3.3 percent, to $22.56 at 4 p.m. in composite trading on the New York Stock Exchange. They've dropped 2.1 percent this year.

$800 Million

The company will take a pretax charge of as much as $320 million in the fourth quarter, which ends on April 30, to reflect the lower value of the assets, it said. Yesterday H&R Block said the impairment charges would cause a net loss in fiscal 2007.

According to a filing yesterday, $152 million of the charge will be to reduce Option One's goodwill, or the fair market value in excess of the original purchase price. That would leave some $170 million to be reduced from the net asset value of Option One, which was $1.27 billion as of Jan. 31.

Based on the $170 million reduction to Option One's value and the $300 million discount provided to Cerberus, the purchase price would be about $800 million if the sale took place today. UBS's Flynn estimated the current tangible asset value at $1.1 billion.

CEO Ernst said he was satisfied with the price although it fell short of his original expectations.

``Given the significant changes in the subprime market, we're pleased with the outcome,'' Ernst said on a conference call with investors, analysts and journalists.

Earnings Contribution

H&R Block bought Option One for $218 million in 1997 from Fleet Financial Group Inc., now a part of Bank of America Corp. As the U.S. housing market boomed and lending to subprime borrowers surged, the unit at its peak in 2004 provided as much as 58 percent of H&R Block's pretax income, exceeding the contribution of the tax-preparation business.

Since its purchase, the mortgage unit has contributed a total of $2.8 billion in pretax earnings, H&R Block said in a January presentation. Option One, based in Irvine, California, ranked eighth among U.S. issuers of subprime mortgages last year, according to the trade journal Inside Mortgage Finance.

In the first nine months of the current fiscal year, H&R Block has recorded losses of about $250 million linked to bad home loans made by Option One.

GM Unit

Cerberus last year led a group of investors buying a majority stake in General Motors Corp.'s finance unit for $7.4 billion. The GM unit, which also makes subprime mortgages, announced about 1,000 job cuts earlier this month.

The Option One transaction is expected to be completed by Oct. 31. The company said it will delay reporting fourth-quarter earnings until June 21 to incorporate charges.

The unit's sale price will be a ``moving target'' as the value of subprime assets change, CIBC's Schneeberger said. Other companies selling subprime units have had to accept reductions in price when their deals closed. UBS's Flynn said she expects further losses at Option One to reduce the price by the closing date to about $400 million.

Investors including Charles Bobrinskoy, vice chairman of Ariel Capital Management, the fifth-largest shareholder of H&R Block, have pressed Ernst to sell the unit.

``This takes away a major overhang,'' Bobrinskoy said in an interview today.

Losing Share

As management struggled with Option One, H&R Block's tax business was losing market share to rivals. To reverse the erosion, Ernst has offered new loan products this year and opened branches earlier than usual to welcome advance filers. About 16.4 million clients sought the company's help as of March 31, an increase of 3 percent from last year, the company said yesterday.

Most of the gain came from customers using their software and online services, which are less profitable than those coming into branch offices. The increase in customers visiting branches was 0.4 percent compared with last year.

Those were ``disappointing results'' and don't provide a positive outlook for improvement in the tax business, UBS's Flynn wrote today.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: April 20, 2007 16:13 EDT