April 16, 2007 / 4:34 AM / 12 years ago

Sallie Mae to sell itself for $25 billion

NEW YORK (Reuters) - Sallie Mae, a student loan company under fire from regulators and lawmakers, said on Monday it had accepted a $25 billion takeover bid from two private equity funds, JPMorgan Chase & Co. and Bank of America Corp.

The deal, the largest U.S. private equity buyout in the financial sector, values Sallie Mae at $60 a share, or more than 25 percent higher than its closing price on Friday.

Sallie Mae is selling itself during a difficult time for the student loan industry. Attorneys general in states, including New York and Connecticut, are probing whether lenders have been offering kickbacks to universities for steering business their way.

The Democratic-controlled House of Representatives and Senate are considering laws that could reduce Sallie Mae’s profit growth. President George W. Bush proposed in February to slash subsidies to student lenders. Sallie Mae’s shares fell more than 15 percent between November and last Thursday.

The political landscape is always an issue for Sallie Mae and the government has the right to change how it helps students pay for education, said J. Christopher Flowers, one of the investors in the deal.

“We understand and respect that. That’s just part of doing business in this landscape here,” Flowers told Reuters.

If Sallie Mae can move past its current political and regulatory straits, it could perform well longer term, said Colin Blaydon, a professor at Dartmouth’s Tuck School of Business who helped set up Sallie Mae in the 1970s.

“This is an expanding market. College prices are rising, and students need financing,” Blaydon said.

Sallie Mae shares rose 18.37 percent to close at $55.35 in on the New York Stock Exchange. The deal is set to close by the end of the year, but political pressure may slow that process, which prevented the share price from moving closer to $60 on Monday, Peter Lobravico, Vice President of Risk Arbitrage Sales/Trading at brokerage Wall Street Access.

Nelnet Inc. shares rose 14.5 percent to $28 on hopes that private equity firms would look at the student lender. First Marblehead Corp. shares dropped 22 percent to $34.60, on concerns JPMorgan Chase and Bank of America, two of First Marblehead’s biggest customers, would over time use Sallie Mae for more of their student loan securitizations.

Bank of America and Chase said they will continue to operate their independent student lending businesses and First Marblehead’s chief executive told Reuters he expects business to proceed as usual for his company.

STANDARD IS UNUSUAL

Sallie Mae, whose legal name is SLM Corp., said two private equity funds, J.C. Flowers & Co. and Friedman Fleischer & Lowe, would invest $4.4 billion and own 50.2 percent. Bank of America and JPMorgan will each invest $2.2 billion and own 24.9 percent.

That means about a third of the acquisition will be financed with equity, and the rest with debt, which is about average for a leveraged buyout.

But average is unusual for a buyout of a lender, which usually has high borrowings to begin with, and suffers weaker margins if it takes on too much debt.

Bank of America and JPMorgan are providing both debt financing for the deal and additional financing to Sallie Mae before the closing date. Their total commitment to the deal is about $200 billion, Flowers told Reuters.

Sallie Mae could raise its corporate debt levels and start borrowing in other markets instead, such as the asset-backed security market, according to asset-backed bankers and CreditSights analysts.

That possibility spurred Moody’s Investors Service and Standard & Poor’s to say they may cut Sallie Mae’s ratings.

The deal values Sallie Mae at about 18 times estimated 2008 earnings, which is a touch higher than the 17 times forward earnings that CIT Group Inc. paid for the Student Loan Xpress business in 2005, said Sameer Gokhale, an analyst at Keefe, Bruyette & Woods in New York.

FORMER GSE

Last week, Sallie Mae settled with New York Attorney General Andrew Cuomo for $2 million. The company did not admit wrongdoing, but did promise to change some lending practices.

Sallie Mae was created in 1972 as a quasi-governmental company known as a “government-sponsored enterprise.” It began cutting its direct government ties in 1997, a process completed in 2004. After the takeover, Sallie Mae’s current management will continue to lead the company.

The transaction requires the approval of regulators and Sallie Mae’s stockholders. Sallie Mae will not pay any dividends before completing the deal. The company will still have publicly traded debt.

UBS Investment Bank was the lead financial adviser to Sallie Mae and its transaction committee, which was also advised by Sandler O’Neill and Greenhill & Co. JPMorgan and Banc of America advised the investor group.

Additional reporting by Michael Flaherty and Jessica Hall in New York.

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