October 9, 2007 / 9:12 PM / 12 years ago

Sallie Mae $25 billion buyout ends up in court

NEW YORK (Reuters) - The planned $25 billion buyout of U.S. student lender Sallie Mae SLM.N has ended up where many said it would — in court.

Sallie Mae said late on Monday that it filed a lawsuit seeking a breakup fee of $900 million from the consortium led by J.C. Flowers & Co, which last week proposed to cut its bid price for the lender citing a recent credit market squeeze and legislation that slashes subsidies to student lenders.

Sallie Mae’s lawsuit seeks a declaration that the buyer group has reneged on the merger agreement, that no “material adverse change” has occurred, and that Sallie Mae may terminate the takeover and collect the $900 million.

A material adverse change (MAC) is a condition that could cause a substantial reduction in earnings power and it can give buyers or lenders a “walk right” from their obligations.

The lawsuit is being seen by many as a hard-ball attempt by Sallie Mae to force the buyer group to stick to the original deal, in which the group offered $60 a share, or come up with something closer to it than its revised proposal of $50 a share, or $20.6 billion offer, plus extra payments depending on how the company performed.

“We are prepared to close under the contract the parties signed in April,” said Sallie Mae chairman Albert Lord in a statement late on Monday. “Sallie Mae has honored its obligations under the merger agreement. We ask only that the buyer group do the same.”

The original buyout agreement has a $900 million breakup fee. But if the buyers could prove the student lender has suffered a material adverse change, they would not have to pay it.

J.C. Flowers & Co said on Tuesday their revised buyout offer has expired and that the future of deal would be resolved in court.

“We regret that our offer to amend the terms of the Sallie Mae transaction was allowed to expire without discussion,” J.C. Flowers said in a statement. “Instead, Sallie Mae filed what we firmly believe is a meritless lawsuit. We now look forward to having this matter resolved in the Delaware Chancery Court.”

J.C. Flowers repeated its stance that a material adverse change has occurred and that Sallie Mae has misinterpreted the merger contract.

Joel Greenberg, co-chair of law firm Kaye Scholer LLP’s corporate and finance department, said it would be difficult for J.C. Flowers to argue there has been a material adverse change, because the contract specifically addressed the question of new legislation.

“Is it so substantially worse than the company predicted that it is a material adverse change? It’s a very hard argument,” Greenberg added.

MORE NEGOTIATIONS?

The buyers’ consortium includes private equity firms J.C. Flowers & Co and Friedman Fleischer and Lowe and major banks JP Morgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N).

In its revised proposal of $50 a share plus warrants, the consortium said if Sallie Mae performed in line with its own projections, the warrants could result in a payout of more than $7 per share, and if the student lender exceeded its projections, the payout could reach $10 per share.

The consortium’s proposal to revise the offer was due to expire today.

The buyers have argued the combined impact of the legislation and credit crunch would reduce the student lender’s core earnings net income by 14.4 percent in 2009, and by 20.1 percent in 2012, when compared with assumptions provided by Sallie Mae.

On September 27, President George W. Bush signed student loan legislation that cuts federal subsidies to lenders such as Sallie Mae, Citigroup (C.N), Bank of America and many others.

If the Sallie Mae deal were to fail, it would be the latest casualty among a series of proposed leveraged buyouts to falter following the meltdown in credit markets over the last couple of months.

Additional reporting by Megan Davies and Michael Flaherty

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