Update: Sallie Mae Responds to New Buyout Offer

From the Associated Press
After a group of investors reduced its cash offer for Sallie Mae by 17 percent on Tuesday, the nation's largest student lender insisted that the buyers honor their original $25 billion deal. See Sallie Mae's statement.

The investor group, which is led by private equity firm J.C. Flowers & Co. and includes Bank of America and JPMorgan Chase, said the student-loan legislation signed into law by President Bush, and weaker economic conditions, made the $60-a-share price negotiated in April unacceptable.

The group sent its revised offer to the board of the Reston company, formally called SLM Corp., saying that $50 a share now "appropriately and fairly reflects the new economic and legislative environment that faces the company."

Under the new offer, which is worth about $21 billion in cash, Sallie Mae has the potential to receive an additional payment of more than $7 a share if the company performs on track with its own projections. It could receive an extra $10 a share if the company exceeds those expectations.

In a terse statement, Sallie Mae said it expects Bank of America Corp. and JPMorgan Chase & Co. "to honor that contract, not breach the contract," which calls for the deal to be closed later this month.

Shares of Sallie Mae fell 15 cents, or 0.3 percent, to $49.75 in afternoon trading.

The new student loan legislation will cut about $20 billion in federal subsidies to companies like Sallie Mae that make student loans while halving the interest rate on government-backed student loans. According to Sallie Mae, the new student loan law will reduce its "core earnings" net income between 1.8 percent and 2.1 percent each year over the next five years.

In a letter to Sallie Mae's board, the head of the Flowers firm, J. Christopher Flowers said the revised proposal represents "a significant premium to what the company's unaffected share price would likely be based on historical trading ranges and current market conditions."

Under the terms of the deal, significant negative developments can nullify it. Sallie Mae says the anticipated reduction in earnings does not rise to that level of significance.

If the deal were to fall through, the acquisition agreement between Sallie Mae and the investor group provides for a $900 million breakup fee payable by either side under certain conditions.

For months, the drama around what could be one of the world's largest private-equity takeover deals has been punctuated by rancor and disputed claims between the two sides. In the time since the original deal was struck in April, the once-booming private-equity industry has stumbled as an acute squeeze in credit markets has caused investors to balk at financing big deals.

Buyout firms like Flowers -- which acquire public companies and take them private, restructure them and then sell them a few years later at a profit -- had been riding a wave of easy credit but recently have found it harder to persuade their bankers to finance takeovers.

Cerberus Capital Management in July had to inject more equity into its takeover of Chrysler Group from German automaker Daimler. More recently, Home Depot lowered the sale price on its wholesale supply unit by 17 percent to complete its sale to private-equity firms, including District-based Carlyle Group. And two private-equity firms backed out of their $8 billion buyout of upscale audio equipment maker Harman International Industries, also of the District.

By Mike Shepard  |  October 2, 2007; 4:50 PM ET  | Category:  Sallie Mae
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