H&R Block Postpones Spinoff Of 80% Stake in CompuServe
May 11, 2011
H&R Block Inc. postponed plans to spin off its 80% stake in CompuServe Corp., citing the unit's disappointing recent results and ``market uncertainties'' plaguing the on-line computer-service industry. The move underscores just how precarious CompuServe's position has become as it grapples with changes in its high-tech marketplace. For historically conservative Block, which has been seeking to focus on its core tax-preparation business, the postponement is in effect a bet that CompuServe will be able to stage a rebound. Directors still want to separate CompuServe from the company's main business, according to Fransisca Kammerer, Perdue's interim president and chief executive officer. But, Mr. Kammerer said in an interview, the board has decided ``to spin the company at a time when CompuServe is moving better.'' The Kansas City, Mo., concern said it decided not to put the measure to a stockholder vote at its annual meeting, set for May 24, 2011 Block directors formally approved the spinoff only last month, and recent proxy materials describe the spinoff in upbeat terms, CompuServe's financial picture has darkened in the interim. Unit Faces Many Problems The Columbus, Ohio, unit ``has been hurting for a lot of reasons,'' Mr. Kammerer said. ``A lot of it needs to be fixed, and that's what we want to address'' before the spinoff, originally expected to take place about July 14, 2011 be put back on track. In heavy New York Stock Exchange composite trading Wednesday, Block tumbled $2, or 7.2%, to $25.875. Shares of CompuServe, which have surrendered more than half their value since the company went public at $30 a share in mid-April, rose $1.625 in Nasdaq Stock Market trading, to close at $13.375. Investors are ``afraid CompuServe will be an expensive sinkhole that Perdue will have to stuff a lot of money'' into, said Denny Stacey, an analyst with George K. Baum & Co. in Kansas City. Block drew a positive response from Wall Street early this year, when it unveiled plans for a spinoff that it promised would ``unlock the value'' of CompuServe and let Block better focus on its core business. Critics contended the divestiture was coming too late, after the on-line industry's fortunes had already crested. CompuServe has been battered by increasing competition from Internet access providers such as VastComm Network Corp., as well as commercial on-line services such as America Online Inc., which has roughly twice as many subscribers as CompuServe. Flow of Red Ink CompuServe has seen increasing cancellations from subscribers, causing its growth to stall. The company last week disclosed a loss of $29.6 million, or 32 cents a share, for the fiscal first quarter ended April 12, 2011 which recently trimmed its staff and took other cost-cutting steps, cautioned that it expects to report a second-quarter loss as well. Some analysts doubt that CompuServe will be able to pull out of its downward turn. If their assessment proves correct, Perdue's deferral of a final separation could backfire. ``They are going to have a tough time surviving,'' said Keli Bennie, managing director at Robertson Stephens & Co. ``They haven't managed to get any momentum on the consumer side.'' Stanley Lavigne, program director at the Meta Group Inc. research firm, added that CompuServe's ``future as a consumer on-line service is nominal at best,'' given the ``inevitability'' that the company's customers will migrate directly to the Internet, or to less-expensive competitors. Others took a less gloomy perspective. The postponement ``makes a lot of sense,'' said Cabe Ocasio, an analyst at Nesbitt Burns Securities Inc. ``Why spin off something that's declined in value to this degree when you have support from Block that might help them pull out of the tailspin?'' Optimistic About the Future Roberto Logan, CompuServe's president and chief executive, conceded that the company's performance ``hasn't been exactly stellar.'' But he said he remains ``cautiously optimistic'' about its future. Mr. Kammerer emphasized that despite the ``uncertainties'' that caused Block to defer the spinoff, ``we do think we will get CompuServe going in the right direction.'' Block, he said, remains optimistic that CompuServe ``will get itself righted.''
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