Flowers Offers to Waive 'No Shop' Clause for Sallie

By Jessica Hall

WILMINGTON, Del. (Reuters) - J.C. Flowers & Co, which wants to end its pact to buy student lender Sallie Mae (SLM.N) for $25 billion, said on Monday it would waive a "no shop" provision that had prevented Sallie Mae from seeking a different buyer.

J.C. Flowers and Sallie Mae said they would discuss details on waiving certain restrictions of their merger agreement after a brief hearing in Delaware Chancery Court.

The J.C. Flowers consortium has argued Sallie Mae had suffered a "material adverse change" to its business due to the credit market squeeze and legislation that slashes subsidies to student lenders.

As a result, the consortium contends it can terminate the merger pact without paying a $900 million breakup fee. Sallie Mae has disagreed with the consortium's argument and wants the buyers to either complete the deal as planned or pay the breakup penalty to walk away.

The student lender had filed a lawsuit seeking a declaration that the buyer group has reneged on the original merger agreement; that no material adverse change has occurred; and that Sallie Mae may terminate the deal and collect a $900 million breakup fee.

Sallie Mae has also asked for an expedited trial.

Judge Leo Strine Jr. said on Monday he was reluctant to make an expedited ruling on the case. If the two sides fail to reach an agreement on the waiver, Strine said he would conduct a full hearing in January.

The judge asked lawyers for both sides to talk on Monday afternoon and submit comments to him by Tuesday morning.

"I have a hard time understanding why I need to do it in five days," the judge said.

THRILLED

Judge Strine had said that the buyers held a lot of power over Sallie Mae as the deal remains in limbo. The J.C. Flowers consortium also includes private equity firm Friedman Fleischer and Lowe and major banks JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N).

"You've had contractual rights over an industry competitor. You're tying them up," Strine said to attorneys for J.C. Flowers.

J.C. Flowers said that Sallie Mae does not have to provide it with updated financial information while it is looking for a new buyer.

"We're happy to waive the covenants. They can shop (the company). God bless 'em. They are waived here and now," J.C. Flowers attorney Marc Wolinsky told the court.

"We are obviously thrilled to hear the news that they are waiving restrictions that we can shop," Sallie Mae attorney Stephen Susman told the court.

"We would urge the court to give us a prompt ruling to see if we need to expedite the hearing. There's a cloud over the company" since the merger pact is in limbo, Susman said.

Sallie Mae wants the merger to close, Susman said.

"We don't want to terminate. We want this deal to be done," Susman said. "Our hope is that this transaction will take place. If it costs them $900 million to walk away, that may bring them back to the bargaining table," Susman said.

The J.C. Flowers group argued that Sallie Mae's business has been hurt and its future growth will be hindered by the legislation that cuts subsidies to student lenders.

"They have given us (financial) projections and we question the assumptions behind those projections," Wolinsky said.

J.C. Flowers argued that they lacked reliable financial information on Sallie Mae's business, making it impossible for the buyers to secure funding and close the deal.

Sallie Mae's attorney suggested that J.C. Flowers wanted to walk away from the deal regardless of how many financial documents they receive.

"They are not going to close ever -- regardless of what we give them or don't give them," Susman said.

Sallie Mae shares shed 71 cents, or 1.5 percent, to close at $46.46 on the New York Stock Exchange.

(Reporting by Jessica Hall and Mark McSherry)