Flowers off hook, Blackstone may abandon Alliance(2)

US student lender Sallie Mae will accept a $30 billion refinancing in lieu of a JC Flowers-led buyout. Meanwhile, Blackstone has told Alliance Data it does not think the company can meet closing conditions for a $6.43 billion acquisition.

Deal developments for private equity firms JC Flowers and The Blackstone Group point to a tough financing market.

US student lender Sallie Mae has agreed to abandon a $25 billion buyout agreement with JC Flowers, Friedman Fleischer & Lowe, Bank of America and JPMorgan Chase, ending a legal battle of many months.

In other news, The Blackstone Group told Alliance Data Systems today that it does not believe the credit card services provider will meet closing conditions to a $6.43 billion (€4.34 billion) takeover agreement inked in May, a claim which Alliance Data has vehemently refuted.

In exchange for walking away from the Sallie Mae deal without paying the $900 million breakup fee, Bank of America and JPMorgan Chase will lead the refinancing of $30 billion of Sallie Mae’s debt that was due in February. Barclays Capital, Deutsche Bank, Credit Suisse, the Royal Bank of Scotland and UBS will also participate in the refinancing. The problem of refinancing the line of credit has haunted Sallie Mae for months. The lender had been unable to issue new debt since the credit crisis this summer.

The JC Flowers consortium agreed the deal in May 2007, but said as early as July it would possibly drop or want to renegotiate the $25 billion buyout, citing a material adverse change related to a new law that slashed subsidies available to Sallie Mae by up to $19 billion. Sallie Mae refused to budge, rejecting an October offer $50 per share rather than $60 per share, and suing the consortium to close the deal or pay the breakup fee.

Upon completion of the refinancing, the lawsuit will be dismissed and the merger agreement terminated, Sallie Mae said in a statement.

It is still unclear what action, if any, Alliance Data will pursue if Blackstone backs out of the merger. Blackstone told the company that it does not believe Alliance Data will meet closing conditions of the agreement related to obtaining approvals from the Office of the Comptroller. Blackstone said the office is “demanding that extraordinary measures be taken by ADS, Holdco and various Blackstone entities in connection with the Change in Control Notice” that represent “unprecedented and unacceptable financial and operational requirements that would impose an unlimited and indefinite liability on Blackstone and its funds”.

Alliance Data said that it “strongly disagrees” with the assertion that the Comptroller’s position in the matter is final, and said it believes Blackstone has the ability to satisfy the office’s requirements. Blackstone is willing to renegotiate the terms of the deal to “seek a mutually agreeable solution”, but Alliance Data has not yet indicated how much it will concede.

According to an October report in Fortune magazine, The Blackstone Group may bid for Sallie Mae once its legal battle with the JC Flowers group has concluded.