The planned $25 billion buyout of SLM Corp. could be in jeopardy as the investors that agreed to buy the nation’s largest student lender, commonly known as Sallie Mae, say congressional legislation could kill the deal.
Sallie Mae disputes that. The takeover deal, one of the largest private buyouts ever, is led by private-equity firm J.C. Flowers & Co. At issue are the two sides’ interpretation of their acquisition agreement, signed in April, under which significant negative developments can nullify the deal.
Legislation that passed the House Wednesday would cut in half the interest rate on government-backed student loans — a move that would be paid for by a roughly $19 billion reduction in federal subsidies to student lenders like Sallie Mae. The bill also would cap annual loan repayments at a percentage of a student’s income, protecting graduates with low salaries from having to pay back more than they can afford.
The Bush administration’s 2008 budget proposal, put forward in January, called for a roughly $15.5 billion cut in subsidies to lenders.
It has been clear for months that subsidy reductions were unavoidable for Sallie Mae, which is under scrutiny by lawmakers for its student-loan marketing.
Sallie Mae said Wednesday it had been informed by the investors’ group, which also includes Bank of America Corp. and JPMorgan Chase & Co., that the investors believe that legislative proposals pending in Congress “could result in a failure of the conditions to the closing of the merger to be satisfied.”
Reston, Va.-based Sallie Mae said it “strongly disagrees with this assertion, intends to proceed toward the closing of the merger transaction as rapidly as possible, and will take all steps to protect shareholders’ interests.”
If the deal were to fall through, the acquisition agreement provides for a $900 million breakup fee payable by either side under certain conditions.
Stephanie Cutter, a spokeswoman for the Flowers firm, declined to comment.
Sallie Mae shares fell more than 14.4 percent, plummeting $8.30 to $49.50 in regular trading Wednesday before rebounding to as high as $52.80 in extended trading. The investors have agreed to pay $60 per share for the company.
Brian Gardner, a Washington policy analyst for investment firm Keefe, Bruyette & Woods Inc., said neither the newly passed House bill nor a somewhat milder Senate version “constitutes a material adverse change” as the investor group is asserting.
Robert Shireman, executive director of the Project on Student Debt, noted that reductions in subsidies to student lenders “was already a part of what they (Sallie Mae) were looking at” when President Bush’s budget plan went to Congress in January.
Several lawmakers have voiced concern about the buyout deal. Rep. George Miller, D-Calif., who heads the House education committee, has said the prospect of Sallie Mae being taken private “raises significant concerns that even less information will be disclosed to the public.” Privately held companies are not subject to the financial reporting and disclosure rules that apply to public corporations.
In May, Sallie Mae announced the departure of its chief executive, who was replaced by the company’s chief financial officer, C.E. Andrews, in part of an effort to reshape the lender as it prepares to go private. As part of the buyout, Flowers and the other investors are already making changes in Sallie Mae’s corporate structure and operations.
SLM Chairman Albert Lord also is leaving the company, and the entire board of Sallie Mae will be replaced by individuals representing the investing partners.
The company has disclosed that the Securities and Exchange Commission was investigating trading in SLM’s stock related to the planned buyout. That inquiry is separate from a probe of sales of company stock that Lord made a few days before the administration’s budget proposal was made public.