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Sallie Mae Rejects Reduced Offer, Won't Negotiate

By David Cho and Thomas Heath
Washington Post Staff Writers
Wednesday, October 3, 2007

A private-equity group tried to revive takeover talks with Sallie Mae yesterday by proposing a cheaper purchase price, but the student lending giant stonewalled the $21 billion offer.

The revised deal is about $4.2 billion less than what the two sides had agreed to in April. But the buyers' group said it would be willing to make up the difference if Sallie Mae exceeded certain profit projections over the next five years.

Sallie Mae officials took a hard-line stance against the new offer, according to a person close to the Reston firm. Its representatives walked out of a meeting last week after the buyout group announced it would not purchase the company at the original price of $25.3 billion, or $60 a share.

No meetings or conference calls have since taken place between the two sides. Sallie has rebuffed its suitors' requests to talk, according to a person close to the buyers' group.

Sallie Mae "has been unwilling to meet" with the prospective buyers, said the person, who spoke on condition of anonymity because the overtures have been private.

The buyout group told Sallie Mae that it would keep the offer on the table until Oct. 9. But with a chill settling over the relationship, the fight is becoming nasty and could end up in court. The suitors, who are led by private-equity firm J.C. Flowers and include Bank of America and J.P. Morgan Chase, could pay a $900 million breakup fee and walk away. But that would be painful for the banks, which offer competing student loan services.

Instead, the buyers are trying to back out by saying the circumstances surrounding the sale have been affected by the turmoil in the credit markets and a move by the government to cut subsidies to student lenders. Those factors are significant enough, they contend, to trigger a "material adverse effect" clause that allows them to cancel the deal without paying the breakup fee.

Sallie Mae released a statement suggesting the banks would take a hit to their reputations if they failed to complete the deal, which would be one of the largest in history.

"Our contract is with Bank of America and J.P. Morgan Chase, two of America's largest and strongest banks," the statement said. "We expect these banks to honor that contract, not breach the contract."

The new offer proposes a buyout at $50 a share. It also offers a warrant, which would entitle shareholders to a one-time payment five years after the deal closes. If Sallie meets its profit projections, shareholders would get $7 for every share they own. If Sallie exceeds its expectations, investors could get as much as $10 a share. Warrants can be traded like stocks.

"This revised proposal offers full and fair value to the Sallie Mae shareholders in light of the changes that have occurred since the signing of our agreement," Flowers founder J. Christopher Flowers said in a letter sent to Sallie's board yesterday.

The credit turmoil coupled with legislation signed by President Bush last week would reduce Sallie's core earnings by 14 percent a year until 2012 and even more after that, according to the buyers.

Sallie estimates that the impact will be much less severe. Its officials say the firm informed its suitors of the possibility of such legislation before they agreed to the buyout. That disclosure negates the material adverse effect clause, Sallie officials have argued.

Two people in regular contact with Sallie's board said it is still upset that the buyers pulled out of the original offer. Both spoke on condition of anonymity because board deliberations are private.

"Not so very long ago you could trust the big banks," one of the sources said.

Another added: "It's not [Sallie's] problem that the credit markets have deteriorated. That's the risk the buyers took. That's the risk any buyer takes in a transaction."

These sources also dismissed the value of the warrants since the payout would be so far into the future.

Given Sallie Mae's long-term prospects, the warrant proposal is worth so little that it does not "pass the giggle test," one source said.

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