Sallie Mae offer cut 17 percent, with caveats
The investor group that earlier proposed to buy student lender Sallie Mae for $25 billion reduced its offer by 17 percent, but said it's willing to sweeten the deal if the company meets or exceeds certain performance targets.
The offer for Sallie Mae was one of the largest private-equity offers in U.S. history and one of several deals that prolonged the bull market. But last week, private-equity firm J.C. Flowers, which is leading the investor group, said it couldn't close the deal under the original terms because of changes in the legislative and economic environment.
One of those changes occurred Thursday, when President Bush signed legislation that will cut $20 billion in government subsidies to private student lenders such as Sallie Mae. In addition, the current credit crunch has tightened lending standards, escalating the cost of private-equity deals.
Sallie Mae's immediate response to the revised offer was not welcoming. Spokesman Tom Joyce said the company's board will evaluate the proposal but expects the investor group to abide by the original agreement.
In the revised offer, the Flowers group proposes to buy Sallie Mae for $50 a share in cash, down from its original offer of $60 a share. But its offer now includes warrants that would pay out an additional $7 a share if Sallie Mae's earnings met the company's projections, or $10 a share if the company exceeded those projections.
"This revised proposal offers full and fair value to the Sallie Mae shareholders in light of the changes that have occurred since the signing of our agreement," the letter said.
Under the terms of the contract, the investor group could be required to pay Sallie Mae $900 million if it walked away from the deal. But the group wouldn't be liable for the fee if it could prove that Sallie Mae has suffered a "material adverse effect" on its business since the original offer was made.
Sallie Mae has contended that the federal subsidy cuts will have a minimal impact on its earnings - not enough to trigger the "material adverse effect" clause that would let Flowers abandon the deal.
Richard Peterson, director of capital markets at Thomson Financial, says it's in the best interest of the banks involved to complete the buyout. Otherwise, he says, their ability to participate in future deals could be jeopardized.
In a statement Tuesday, Sallie Mae singled out the two big banks in the investor group. "Our contract is with Bank of America and JPMorgan Chase, two of America's largest and strongest banks," the company said. "We expect these banks to honor that contract, not breach the contract."
Sallie Mae's shares closed at $50.09, up 19 cents.
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