Consortium to drop $25bn Sallie Mae deal

A JC Flowers-led consortium has said it will likely drop its $25 billion bid for Sallie Mae, but is willing to renogotiate the deal, taking into consideration a changed economic and legislative environment.

Pending US legislation and economic conditions may halt the JC Flowers-led, $25 billion (€17.6 billion) buyout of US student loan company Sallie Mae.

JC Flowers, JP Morgan Chase, Bank of America and Friedman Fleischer & Lowe have told Sallie Mae they do not believe the company will satisfy the closing conditions of the merger “as a result of changes in the legislative and economic environment”, according to a statement.

The consortium added it is “open to discussing a revision of the transaction that reflects this new environment”.

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”.

In July, the consortium told Sallie Mae that it could drop or even withdraw its bid due to the impact of a pending bill, which President Bush is expected to sign today, that will slash the subsidies currently available to Sallie Mae by up to $19 billion.

Sallie Mae countered concerns about the new bill in its most recent statement, saying that legislation will only reduce its core earnings net income by between 1.8 percent and 2.1 percent annually over the next five years.

If the buyout consortium cannot prove that Sallie Mae’s financial condition meets the requirements of a material adverse change (MAC) clause, the firms could have to pay a $900 million breakup fee.

Proving a MAC has occurred, in general, is “a tough standard to meet”, said C. Todd Boes, a partner in Ropes & Gray’s corporate department who specialises in transactions including LBOs.

“How you define what a MAC is has been changing in the frothy deal environment we’ve had over the last couple years,” Boes recently told PEO. “How the MAC clause is phrased has sort of gotten more seller-friendly.”

Generally, a MAC is understood to be applicable only when something very serious and fundamental has occurred to the business in question, and there’s often a proviso that excludes specific events – such as economy-wide or industry-wide changes – from triggering a MAC, further protecting the seller, Boes said.

Several pending mega buyouts have been renegotiated or dropped in recent months.

Last week, Kohlberg Kravis Roberts and Goldman Sachs dropped their $8 billion buyout of stereo maker Harman International Industries, claiming a material adverse change in the company’s financial condition. And recently, Lone Star, a Texas-based private equity firm, invoked the MAC clause in its attempt to walk away from a $400 million agreement to buy subprime lender Accredited Home Mortgage. The mortgage company in turn sued the buyout firm to force the sale, which prompted Lone Star to offer to proceed with the buyout at a reduced price. The two firms eventually inked a $296 million agreement and dropped pending lawsuits.

One of the most-publicised recent renegotiations was the $8.5 billion buyout of Home Depot’s HD Supply division by Bain Capital Partners, The Carlyle Group and Clayton Dubilier & Rice. The firms paid $1.8 billion less than originally agreed, due to deteriorating credit conditions and a slumping housing market.