A student-loan bill that Congress is expected to pass this week is setting the stage for a brutal showdown over the $26 billion takeover of student lender Sallie Mae – one of the largest private-equity deals ever attempted.
Last night, lawmakers including Sen. Edward Kennedy (D-Mass.) were nearing an agreement to reduce the federal subsidy paid to student lenders by slightly more than originally expected.
Some analysts believe the fast-tracked bill could give more fuel to the group of private-equity buyers, led by New York billionaire J. Christopher Flowers, who have been posturing to cut the price of the buyout.
Sallie Mae’s board of directors, led by Chairman Albert Lord, claims the new legislation is not materially different from what was proposed at the time the company signed the deal with Flowers in April.
If the investment group wants to break the contract, they have to pay Sallie Mae $900 million in break-up fees, the company argues.
The final bill is expected to cut the federal subsidy to student lenders by about $20 billion over five years. Friedman Billings Ramsey analyst Andrew Parmentier said the cut is bigger than what the market was expecting.
The bill will also shrink the safety net the federal government provides lenders against students who miss payments and forces lenders to competitively bid for certain loans.
Flowers and Wall Street giants Bank of America and JPMorgan Chase agreed to pay $60 a share for Sallie Mae, but they claim the recent legislation triggers a clause that allows them to walk away from that deal.
The battle over whether Flowers can get out of the deal could end up in court if the company refuses to engage in negotiations to lower the price.
Sources close to the buyout said there are currently no ongoing talks between the two sides, but that could change once the legislation is signed by President Bush.
Investors believe Sallie Mae will likely renegotiate the price of the buyout – which could drop to as low as $53 per share – instead of going through a long and costly court fight.
Flowers could have additional leverage in negotiations because JPMorgan and Bank of America have both committed to lend $30 billion to allow Sallie Mae to continue funding student loans. The banks can pull that loan if the deal falls through.
Sallie Mae shares ended down 1.6 percent at $49.10.