$26bn Sallie Mae deal under threat(3)

The JC Flowers-led consortium trying to buy US lender SLM Corp for $26 billion threatened to pull its bid yesterday, knocking almost 10 percent off the share price, as US lawmakers proposed a bill to slash student loan subsidies.

The proposed $26 billion (€19 billion) buyout of US lender Sallie Mae was thrown into doubt yesterday, when the private equity consortium buying the business threatened to pull out over proposed legislation that would reduce student loan subsidies.

The consortium, which is being led by US firm JC Flowers, has informed Sallie Mae that various bills being discussed in the US to cut subsidies by as much as $19 billion “could result in a failure of the conditions of the merger to be satisfied”, according to a statement by the lender.

However, the lender said it “strongly disagreed” with the consortium’s position. It added that it: “intends to proceed towards the closing of the merger transaction as rapidly as possible and will take all steps to protect shareholders’ interests”.

The row has been sparked by proposed reforms to the current student loans system, which currently allows Sallie Mae to raise money by issuing bonds to investors, and then lending it to students at subsidised rates. The US House of Representatives has been debating a bill to cut about $19 billion in subsidies, following scrutiny by New York Attorney General Andrew Cuomo, although the White House has threatened to veto the proposals.

The statement reveals that Sallie Mae and the JC Flowers group are in disagreement over the interpretation of the “material adverse change” clause in the original agreement, which specifies the circumstances under which the deal may be subject to revision or even cancellation.

The threat of the deal falling through, or going ahead at a reduced price, sent Sallie Mae’s share price tumbling by 9.8 percent yesterday, to close on $52.15.

The proposed deal would be by far the largest buyout to date in the financial services sector, which has not traditionally been a target for private equity firms. The bid consortium comprises JC Flowers, Friedman Fleischer & Lowe, JPMorgan Chase and Bank of America.