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Sallie Mae Outlook Lowered, Deal 'Dead'

Sallie Mae's stock price sank more than 10 percent Wednesday after the student lender cut its 2008 profit forecast and said it failed to revive interest from an investor group that once offered to buy it for $25 billion.
/ Source: The Associated Press

Sallie Mae's stock price sank more than 10 percent Wednesday after the student lender cut its 2008 profit forecast and said it failed to revive interest from an investor group that once offered to buy it for $25 billion.

The company's weakening financial outlook could bolster the investor group's legal argument that it should not have to pay a $900 million fee for walking away from the deal because of significant changes in economic or regulatory conditions affecting SLM Corp., Sallie's formal name.

Reston, Va.-based Sallie, the nation's largest student lender, lowered its earnings forecast for next year by more than 13 percent, blaming a new law that reduced federal subsidies and the need to hoard cash to offset bad student loans.

Sallie's shares sank $3.45, or 10.8 percent, to $28.49 a share. That is more than 50 percent below the $60-per-share offer made in April by the investor group, which is led by private-equity firm J.C. Flowers & Co. and includes Bank of America Corp. and JPMorgan Chase & Co.

"Deal dead," declared analyst Matt Snowling at Friedman, Billings, Ramsey & Co. in a research note. In addition to reduced subsidies and higher loan defaults, Snowling said Sallie Mae faces new competition from consolidators, or loan brokers.

The developments come at a stressful time for Sallie _ which lost $344 million in the third quarter _ and for the student loan industry in general.

Defaults are rising on student loans, and credit-market tremors similar to those linked to the mortgage crisis have begun to show up in the $85 billion student-loan market.

Last Friday, First Marblehead Corp., which packages student loans for sale to investors, said it would suspend that activity during the fourth quarter. The move by the company, which cited "challenging times" in the capital markets, means less money will be pumped into the market for higher-rate private student loans, those not backed by the government.

Shares of First Marblehead slid $1.31, or 8 percent, to $14.83.

Sallie and the Flowers group have been feuding for months over terms of what would be one of the world's largest private-equity takeover deals, and the dispute has landed in court. A trial is expected to start late next year in Delaware Chancery Court.

The investor group maintains that a "material adverse effect" has occurred, and therefore it should not have to pay a $900 million breakup fee.

However, several lawyers who specialize in mergers and acquisitions and corporate litigation have said judges traditionally have been skeptical of buyers' efforts to walk away from acquisitions by arguing that economic or regulatory conditions have changed so much that deals should be terminated.

The reduced earnings forecast "is a fact that mitigates in favor of a claim (by the investor group) that there's a material adverse effect," said Gregory Bishop, an attorney who specializes in banking law at Williams Mullen in Richmond, Va. Still, he noted, "the tenor of Delaware courts has been to hold people to their deals. ... It's a better fact for Flowers than Sallie Mae, but I don't know if it's enough."

A person close to the Flowers group, speaking on condition of anonymity because they were not authorized to speak publicly, said Wednesday that the investors told Sallie Mae last week they wouldn't be able to make a revised offer the student lender would accept. The investor group "does not wish to pursue these opportunities," Sallie said in a press release.

Company officials said in October that they had received expressions of interest from other potential suitors, but no deal has emerged.

Sallie said Wednesday that it "will pursue all available recourse, including its lawsuit against the investor group."

The student lender trimmed its forecast for 2008 "core" earnings from $3.25 a share to a per-share range of $2.60 to $2.80.

In the fourth quarter, it expects per-share core earnings, which excludes nonrecurring items, to come in at 52 cents to 57 cents. Analysts polled by Thomson Financial recently lowered their estimate of Sallie earnings for the fourth quarter to 71 cents a share, on average, down from 74 cents a share a month ago.

In the third quarter, Sallie wrote off $142.6 million for borrowers missing payments on student loans, more than doubling the $67.2 million writedown of a year earlier.


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