Shareholders Agree to Buyout Of Sallie Mae - washingtonpost

[Pages:3]Shareholders Agree to Buyout Of Sallie Mae - washingtonpo... ...

Shareholders Agree to Buyout Of Sallie Mae

By David S. Hilzenrath Washington Post Staff Writer Thursday, August 16, 2007; D01

Sallie Mae shareholders yesterday approved the sale of the student loan company to a group of private buyers, but the company's stock continued to trade far below the $60-per-share deal price, indicating that investors doubt the buyout will be completed as planned.

On the eve of the vote, the Moody's rating agency underscored the stakes by downgrading Sallie Mae's debt and saying that the company, formally known as SLM Corp., could be weakened if the deal falls apart.

If completed, the $25 billion buyout would transform the student loan industry, and it would produce financial windfalls for Sallie Mae employees. Chairman Albert L. Lord's options and stock awards would be cashed out at a gain of $224.9 million. But student and labor groups worry that the transaction could lead to higher borrowing costs for students and layoffs at the Reston company.

Lately, the deal has taken on new layers of drama. The easy money that fueled a land rush of corporate buyouts has dried up as a credit crunch has swept financial markets. Legislative proposals to cut federal subsidies could make lenders such as Sallie Mae less profitable, and Sallie Mae's would-be acquirer says the proposed cuts could give it grounds to back out.

About 68 percent of Sallie Mae shares were voted in support of the buyout, company spokeswoman Martha Holler said. The outcome of the vote was largely a foregone conclusion because the $60-per-share buyout price is much higher than the $40.75 at which Sallie Mae shares were trading before news of the deal was reported in April.

In early July, when investors were more optimistic about the buyout, Sallie Mae's stock closed as high as $57.98. Yesterday, the stock closed at $46.75, down 43 cents.

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At a meeting of Sallie Mae shareholders yesterday, which was closed to the media, Lord predicted that the deal would go through as planned, according to people who attended.

"Big boys will show up and do a big boy deal," Lord said, according to Rebecca Thompson of the United States Student Association, who obtained a shareholder's proxy to attend and took notes on the meeting.

But the leader of the prospective buyers, private equity firm J.C. Flowers, has spooked investors by contending that pending legislation could give it an out under the buyout contract -- a position Sallie Mae rejects.

Flowers may be putting pressure on the Sallie Mae board "to finagle a better price," said analyst Sameer Gokhale of the investment firm Keefe, Bruyette & Woods.

A spokeswoman for Flowers, Stephanie Cutter, declined to comment yesterday on the buyer's intentions.

Flowers's partners in the buyout include two big investment banks that are also rivals of Sallie Mae in the student loan business: J.P. Morgan Chase and Bank of America.

Asked whether J.P. Morgan wants the deal to go through as planned, J.P. Morgan spokesman Tom Kelly declined to comment. A spokesman for Bank of America referred questions to Flowers.

In an April interview with The Washington Post, Lord said he sought private buyers to free Sallie Mae from the politics and bureaucracy of federal student loan programs. With Democrats in control of Congress seeking to overhaul the student loan business, and with Sallie's stock depressed, "I didn't see the light at the end of the tunnel," Lord said.

Since the buyout was negotiated, an upheaval in the financial markets could make it costlier and more difficult for the buyers to enlist other investors to help finance the purchase, analysts said.

One incentive for the two banks to go through with the deal is that they could gain an inside track on valuable investment banking work for the company, said analyst Matt Snowling of Friedman Billings Ramsey.

If the buyers were to walk away from the deal, they would be on the hook for a $900 million penalty. But their contract with Sallie Mae outlines certain circumstances under which the penalty would not apply.

If the disagreement between two sides escalates into a legal battle, the outcome could

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hinge on interpretations of whether the proposed subsidy cuts are likely to become law and whether they differ materially from scenarios that were anticipated when the buyout agreement was reached.

In reducing Sallie Mae's credit rating, Moody's said that if the deal were to collapse, the student lender's profitability and its ability to finance its operations would suffer. In addition, some analysts said Sallie Mae could have a hard time reviving its stock price.

The uncertainty and the potential consequences could prompt Sallie Mae to accept a lower offer, some analysts said.

"I don't think it's necessarily possible for Sallie Mae to just turn back the clock to the way it was" before the buyout was announced, said Curt Beaudouin of Moody's.

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