DBRS Comments on H&R Block’s Sale of RSM McGladrey, Unaffected at BBB (high), Trend Stable

DBRS Inc. (DBRS) has today commented that the ratings of H&R Block, Inc. (Block or the Company) and its subsidiaries, Block Financial Corporation LLC and H&R Block Canada, Inc. including its long-term ratings of BBB (high), are unaffected by the Company’s announcement that it has entered into a non-binding agreement to sell its RSM McGladrey (RSM) unit to McGladrey & Pullen (M&P). The trend on all ratings remains Stable.

Block has agreed to sell substantially all of the assets of RSM for total consideration of $610 million, comprised of cash and approximately $65 million of debt to be provided by Block. These amounts will adjust at closing based on fluctuations in the balance sheet. As a result of the sale, and the sale or closure of RSM’s ancillary operations not included in the transaction, Block will record a $53 million non-cash, after-tax charge in the quarter ending July 31, 2011. The sale is expected to close in calendar year 2011, and is subject to a signed definitive agreement, finalization of M&P financing for the transaction, and customary closing conditions.

DBRS views the potential sale of RSM as rating neutral at the time of closing. However, the exit of this non-core business could be ultimately a long term positive for Block. While the transaction removes RSM’s revenue, which in total accounted for some 22% of Company-wide revenue in fiscal year 2011, the potential sale only removes approximately 7% of pre-tax earnings. Importantly, in DBRS’s opinion, this potential transaction will allow Block’s management to dedicate all its resources and focus on investing and growing its higher-margin core retail tax services business. DBRS considers this transaction as a neutral to funding and liquidity and as having a mildly positive impact on the balance sheet, given the removal of approximately $400 million of goodwill associated with RSM. Given Block’s stated intentions of focusing on the retail tax and related businesses, DBRS expects that the majority of the proceeds will be utilized to invest in the core business.

The ratings are underpinned by Block’s strong franchise and leading market position, its noteworthy cash flow generating ability, sound earnings generation power of the core retail tax preparation business and low financial risk profile.

Note:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is Rating Finance Companies Operating in the United States, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include publicly available company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Approver: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 27 August 2010