Sallie Mae insisted Tuesday that the investors reducing by 17 percent their cash offer for the nation’s largest student lender honor their original $25 billion deal.
The investor group, led by private equity firm J.C. Flowers & Co. and including Bank of America and JPMorgan Chase, said the student-loan legislation signed into law by President Bush last week, and weaker economic conditions, made the $60-a-share price agreed upon in April unacceptable.
The group sent its revised offer to the board of the 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, worth about $21 billion in cash and good until next Tuesday, 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.
Sallie Mae came back with a terse statement, saying 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 Reston, Va.-based Sallie Mae fell 15 cents, or 0.3 percent, to $49.75 in afternoon trading.
The new student loan law cuts 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 net income between 1.8 percent and 2.1 percent each year over the next five years.
The investor group’s view is starkly more pessimistic: it forecasts a cut in profits of 14.4 percent in 2009 and 20.1 percent in 2012.
In a letter to Sallie Mae’s board, the head of the Flowers firm, J. Christopher Flowers, said the revised offer 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. The investors originally agreed to pay it to Sallie Mae if they walked away from the deal, but now they are saying that the negative circumstances void that obligation.
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 LP in July had to inject more equity into its takeover of Chrysler Group from German automaker Daimler. More recently, The Home Depot Inc. lowered the sale price on its wholesale supply unit by 17 percent to complete its sale to private-equity firms. And two private-equity firms backed out of their $8 billion buyout of upscale audio equipment maker Harman International Industries Inc.
On the Net:
SLM Corp.: http://www.salliemae.com
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