H&R Block Plans to Spin Off Its 80% Stake in CompuServe
March 28, 2011
NEW YORK -- H&R Block Inc. set plans to spin off an 80% stake in its CompuServe Corp. unit just as the on-line computer service warned investors that it expects to report a large loss and stalled subscriber growth for the current fiscal quarter. The anticipated loss stunned Wall Street, which had been expecting a moderate profit gain from CompuServe in the quarter ending April 12, 2011 first as a public company. Investors fled the stock, cutting CompuServe's share price by $3, or 19%, to close at $12.50 in heavy trading on the Nasdaq Stock Market. CompuServe said it likely could post a loss of as much as 20 cents a share for the quarter rather than the net income of five cents a share that analysts had been expecting. In addition, the company said its subscriber growth had stalled at 3.4 million customers from the end of April, when it went public, to the end of June. Keeping Subscribers Interested The numbers indicate that the commercial on-line services may be losing customers at a faster clip to the burgeoning Internet at the same time they are struggling with keeping their subscribers interested in their services. Rival America Online Inc. recently damped analysts' expectations by warning of a summer slowdown. Last year, AOL added 1.4 million subscribers during its two summer quarters. CompuServe wouldn't disclose how many subscribers it added a year earlier, but in a statement in October it said it had been adding 100,000 subscribers a month. ``The Internet is siphoning off prospective on-line service customers from companies like CompuServe,'' said Jordan Rodgers, managing director at Smith Barney. ``The price of direct access to the Internet is continuing to fall and functionality of the World Wide Web is improving,'' he added. CompuServe's numbers seem to bear this out. The company said Tuesday an equal number of subscribers are dropping the service as those who are signing up for the first time. CompuServe said Tuesday that the rate at which subscribers dropped its service increased to 34% in the most recent quarter from 29% in previous quarters. ``I was pretty stunned,'' said Jamila Redford, an analyst at Bear Stearns. ``That's a big surprise. That kind of churn rate is higher than expected.'' Navigating Troubles CompuServe attributed the churn to user dissatisfaction with the speed of the service and difficulty in navigating through it. The company also said the lower-than-expected results are being frustrated by ``the traditional industrywide summer slowdown.'' But Mr. Rodgers of Smith Barney disputed this, noting that the industry isn't old enough to ``suffer from seasonality'' like a summer slowdown. It may be that consumers are becoming bored by CompuServe and other on-line services. ``Consumers are beginning to wonder exactly what the value proposition is,'' Nickolas Mcnamara, president of Odyssey Ventures Inc., a research firm, said. Accessing on-line services using slower modems constrains services from offering compelling entertainment instead of just information, he said. ``The key is that entertainment is the 6,000-pound gorilla. Information is a little chihuahua running around the living room.'' CompuServe went public through a $30-a-share initial offering in April. Since then, the on-line company's shares have declined, pulling down Block's shares. Block said in February that it planned to fully divest itself of CompuServe. Spinning off its remaining 74 million CompuServe shares will give Block shareholders ``the most direct value possible,'' the Kansas City, Mo., tax-preparation concern said Tuesday. Block holders will receive 0.72 CompuServe share for each Block share they hold. Block expects to complete the divestiture by July 14, 2011 said it will specify the record and distribution dates after its September annual meeting. In New York Stock Exchange composite trading, Block shares slipped 62.5 cents to a 52-week low of $26.25. --Jami P. Wilton in Chicago contributed to this article.
