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Investors balk at Sallie Mae deal

They say terms of the planned buyout are unacceptable amid new student loan legislation.

September 27, 2007|From the Associated Press

WASHINGTON — The planned $25-billion buyout of student lender Sallie Mae was thrown into jeopardy Wednesday after the investors said the terms of deal were no longer acceptable.

Sallie Mae, officially SLM Corp., vowed to pursue legal remedies against the investor group.

The investors, led by private equity firm J.C. Flowers & Co., told Sallie Mae they did not plan to complete the $60-a-share deal negotiated this year, although they remained open to discussing new terms.

The investor group has insisted in recent months that new student loan legislation, expected to be signed today by President Bush, could kill the deal. The measure will cut about $20 billion in government subsidies to companies such as Sallie Mae that make student loans while halving the interest rate on government-backed student loans.

Sallie Mae responded in a statement that it "firmly believes that the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to it to the fullest extent permitted by law."

The company's stock fell nearly 3% on Wednesday to just above $45 a share.

The blowup of one of the largest private equity takeover deals ever capped several months of rancorous back-and-forth and disputed claims between Sallie Mae and the investor group composed of the Flowers firm, Bank of America Corp. and JPMorgan Chase & Co.

It comes against a backdrop of weakness in the once-booming private equity industry, which has stumbled in recent months as an acute squeeze in credit markets has caused investors to balk at financing big deals.

Buyout firms such as Flowers had been riding a wave of easy credit but recently have found it harder to persuade their bankers to finance takeovers. Cerberus Capital Management in July had to inject more equity into its takeover of Chrysler Group from Germany's DaimlerChrysler. More recently, Home Depot lowered the sale price on its wholesale supply unit by 17% to complete its sale to private equity firms.

The Flowers firm, in a statement, said the investor partners believe "that the conditions to closing under the merger agreement, if the closing were to occur today, would not be satisfied as a result of changes in the legislative and economic environment."

Shares of Sallie Mae plunged as low as $41.73, but recovered most of the drop and ended down $1.24, or 2.7%, at $45.01.

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