H&R Block May Draw Merger Proposal, Liberty CEO Says

H&R Block may draw merger proposal, Liberty tax CEO says
Liberty Tax Service CEO John Hewitt. Photographer: Daniel Acker/Bloomberg

H&R Block Inc., the biggest U.S. tax preparer, may get a merger proposal from closely held Liberty Tax Service, according to Liberty founder John Hewitt. The stock rose as much as 5.5 percent.

The decline in H&R Block’s stock through last week under Chairman Richard Breeden makes the Kansas City, Missouri-based firm attractive, Hewitt said today in a phone interview. Eroding market share and declining revenue have helped push the market value below $4.7 billion and spurred a member of the founding Bloch family to leave.

“If it goes much lower, it would be interesting to discuss a possible merger between Liberty and Block,” Hewitt said. “Breeden would have to go.”

Hewitt said he reached out to Thomas Bloch, a member of the family that built H&R Block, after Bloch said last week he’s leaving the board of directors because of differences with Breeden and the company’s strategy. Breeden is a hedge-fund manager and former head of the U.S. Securities and Exchange Commission who gained control of H&R Block in 2007 in a proxy contest, saying the company had underperformed.

Bloch hasn’t responded to a July 14 letter, said Hewitt, whose firm is based in Virginia Beach, Virginia.

“I have had no conversations with John Hewitt,” Bloch said today in a telephone interview.

Kate O’Neill Rauber, a spokeswoman for H&R Block, said it’s company policy not to comment on rumors or speculation.

Bloch’s Letter

H&R Block rose 63 cents to $14.61 at 4 p.m. in New York Stock Exchange composite trading and sold for as much as $14.75. The stock was the sixth-largest gainer today in the Standard & Poor’s 500 Index.

In a letter sent to H&R Block’s board filed with regulators last week, Bloch cited “fundamental” disagreements with Breeden and said the company was “overly generous” with compensation for Chief Executive Officer Alan Bennett. Bloch said a 2008 stock buyback was “ill-timed,” that the 2010 fiscal plan was “overly optimistic” and that the company missed its own earnings target.

Liberty, which said it ranks among the three biggest U.S. tax preparers, said it handled 8 percent more returns in 2010. Jackson Hewitt reported a 14 percent decline and H&R Block a 6 percent decrease.

Hewitt would have “a better chance than most anyone” to execute a turnaround at H&R Block, said Vance Edelson, a Morgan Stanley analyst, in a phone interview today.

‘Certain Challenges’

“Certain challenges would be difficult to overcome though, such as the ongoing market loss to digital,” he said. “Any pronouncement that limits refund anticipation loans would have a negative impact on H&R Block and an even more negative impact on Liberty Tax.”

Hewitt started in the industry after taking an H&R Block tax course in 1969, according to a statement released by Liberty today. He advanced to regional manager before leaving to develop his own software and his own firm, Jackson Hewitt Tax Services Inc., in 1982. Jackson Hewitt is the second-biggest U.S. Tax preparer behind H&R Block.

Hewitt left Jackson Hewitt and in 1997 founded Liberty, which operates 3,200 branches compared with Jackson Hewitt’s 6,600 and H&R Block’s 15.2 million. In March 2009, Hewitt said he wanted to explore a “strategic” deal with Jackson Hewitt; no transaction took place.

“When I went out on my own with my dad, we went back and tried to sell our software to Tom,” Hewitt said. “We put a bid together for a couple of their districts in Kansas City. Maybe they should have bought us back then.”