Sallie Mae, buyout group settle lawsuit over deal
Sallie Mae, formally known as SLM Corp (), dropped its lawsuit and its efforts to seek a $900 million breakup fee from the buyout group in order to gain the funding to replace $30 billion in interim financing that was due February 15.
Bank of America Corp (), JPMorgan Chase () and five other banks were providing the new funding. JC Flowers said it would not be obligated to make any payment to Sallie Mae.
"We believe this announcement is a considerable positive given reduced liquidity risk and would expect investors to again focus on SLM's profitability and growth potential," said Lehman Brothers analyst Bruce Harting.
The interim financing had been put in place by Bank of America and JPMorgan, which were part of the buyout group that also included private equity firm Friedman Fleischer & Lowe.
Sallie Mae's buyout crumbled after the Flowers group walked away and claimed that Sallie Mae had suffered a "material adverse change" to its business due to the credit market squeeze and recent legislation that slashes subsidies to student lenders.
Sallie Mae had filed a lawsuit seeking the breakup fee of $900 million, but the buyout group balked at paying any termination fee.
As part of the new financing pact, the lawsuit filed by Sallie Mae over the proposed merger as well as all counterclaims were dismissed and the merger pact was terminated, Sallie Mae said.
"THE RIGHT THING"
"With little chance of recovering any of the $900 million termination fee and the legal expenses involved, we believe the company did the right thing and secured funding -- presumably at better terms -- as a trade-off," said Matthew Snowling, an analyst at investment group Friedman Billings Ramsey.
"Sallie Mae has long since lost any legal standing on arguing that a material adverse condition had occurred because the company has continued to lower its earnings forecast over time, citing the government's subsidy cut as a reason," Snowling said.
Last week, Sallie Mae posted a fourth-quarter loss due in part to higher provisions for loan losses due to the weakening credit markets.
Securing the new financing also marks a first crucial win for the company's new chairman, Anthony Terracciano, a veteran banking executive, analysts said. Terracciano, who joined Sallie Mae earlier this month, has worked to stabilize Sallie Mae and restore credibility after the failed merger.
Sallie Mae is expected to pay an interest rate of about 4.5 percent on the 364-day financing package, according to The New York Times.
"While there will certainly be a sigh of relief that the credit line has been refinanced, we would echo management's recent comments that it appears costly," said Credit Suisse analyst Moshe Orenbuch.
The Sallie Mae deal is just one of several planned buyouts that collapsed in recent months. On Monday, Alliance Data Systems Corp () said its planned $6.76 billion buyout by private equity firm Blackstone Group was in jeopardy.
Other jilted companies whose deals fell through include mortgage and vehicle fleet company PHH Corp () equipment rental company United Rentals Inc (), and audio equipment maker Harman International Industries ().
Shares of Sallie Mae gained 37 cents, or 1.9 percent, to $20.25 in morning trading on the New York Stock Exchange.
(Reporting by Jessica Hall; Editing by Brian Moss)
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