Sallie Mae Sale In Turmoil

A group of investors that had planned to buy student lender Sallie Mae for $25 billion now wants out of the deal, saying the current economic environment and legislation being signed by President Bush on Thursday make the terms no longer acceptable.

The group led by private-equity firm J.C. Flowers & Co. has told Sallie Mae it doesn't plan to complete the $60-a-share deal negotiated in April, though it is open to discussing new terms. Sallie Mae, the nation's largest student lender and officially known as SLM Corp., vowed Wednesday to pursue legal remedies against the investors.

The investor group has insisted in recent months that new student loan legislation being signed Thursday by President Bush could kill the deal. The measure 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.

The Flowers firm, in a statement, said the investor partners believe "that the conditions to closing under the merger agreement, if the closing were to occur today, would not be satisfied as a result of changes in the legislative and economic environment."

Sallie Mae insists that the deal can and should be consummated next month as planned. The company said in a statement that it "firmly believes that the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to it to the fullest extent permitted by law."

If the deal were to fall through, the acquisition agreement between Sallie Mae and the investor group comprised of the Flowers firm, Bank of America Corp. and JPMorgan Chase & Co. provides for a $900 million breakup fee payable by either side under certain conditions.

Shares of Reston, Va.-based Sallie Mae fell $1.24, or 2.7 percent, to $45.01 Wednesday.

The blowup over one of the world's largest private-equity takeover deals capped several months of rancorous back-and-forth and disputed claims between Sallie Mae and the investor group. It comes against a backdrop of weakness in the once-booming private-equity industry, which has stumbled in recent months 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 last Friday, two private-equity firms backed out of their $8 billion buyout of upscale audio equipment maker Harman International Industries Inc.

A review by Sallie Mae said the new student loan legislation will reduce its "core earnings" net income between 1.8 percent and 2.1 percent each year over the next five years.

The two sides in the deal have differing interpretations of their acquisition agreement, signed in April, under which significant negative developments can nullify the deal. The company does not believe that the anticipated reduction in earnings rises to that level of significance.

"Sallie Mae seems eager to have its day in court," Kathy Shanley, an analyst at Gimme Credit, an independent research service on corporate bonds, wrote Wednesday. "We can't assess the odds of Sallie Mae prevailing on the legal merits of its case, since there is little if any precedent for this dispute. A court battle would certainly be entertaining for observers with no skin in the game, but it remains entirely possible that cooler heads may prevail and bring the parties back to the bargaining table."

Sallie Mae says that its financial performance was strong in the third quarter, with a robust level of new loans and an expected $100 million decline in write-offs for defaults on private student loans - those not backed by the government and whose interest rates aren't capped - compared with the second quarter.