Ahead of the Bell: Sallie Mae Up

Wall Street on Thursday expressed surprise over claims from the investors slated to buy SLM Corp. that pending legislation could jeopardize the deal.

SLM said Wednesday it was informed by the investors' group, led by private-equity firm J.C. Flowers & Co., that legislative proposals pending in Congress "could result in a failure of the conditions to the closing of the merger to be satisfied."

The group, which also includes Bank of America Corp. and JPMorgan Chase & Co., agreed in April to pay $25 billion for SLM, commonly known as Sallie Mae. Sallie Mae said Wednesday it disagrees with the investors' interpretation of the problems posed by pending legislation.

A bill passed by the House Wednesday would halve the interest rate on government-backed student loans and cut federal subsidies for student lenders like Reston, Va.-based Sallie Mae. A version that reduces subsidies a bit less is pending in the Senate.

Analysts noted that subsidy reductions have been expected since the president submitted his 2008 budget proposal in January.

Keefe, Bruyette & Woods analyst Sameer Gokhale said the House version of the bill "was consistent with what was widely expected," and backed Sallie Mae's interpretation that the legislation shouldn't jeopardize the deal.

The House version would trim Sallie Mae's estimated 2008 earnings by about 35 cents per share, compared with about 32 cents for the Senate version and about 30 cents for the president's plan, Gokhale said in a note to clients. "We do not believe either of them is materially more negative compared to the president's proposal. Therefore, we do not believe they could trigger the MAC (material adverse clause) and jeopardize the transaction."

"If this is true, the buyout group may be attempting to negotiate a lower price," he suggested, a thought echoed by Citigroup's Bradley Ball.

"The big question appears to be whether J.C. Flowers and Co. are planning to renegotiate the deal price or back out of the deal outright," Ball said in a note. "We believe that renegotiation would be more likely, but given the small differences between the Senate proposal and the president's budget, we could not foresee a much lower deal price."

Given recent difficulties on the Street raising debt capital for leverage buyout transactions, Ball noted, "it could be a possibility that Flowers would choose to walk away altogether."

The agreement carries a a $900 million breakup fee.

Gokhale noted, however, that JPMorgan and Banc of America could likely provide the necessary financing themselves. He suggested a rival bidder may emerge. "J.C. Flowers, in our opinion, was part of the consortium to help facilitate the deal - a role another private equity bidder or another bank partner could play. We continue to believe the acquisition is likely to be completed, but potentially at a slightly lower price.

Sallie Mae shares fell $5.65, or 9.8 percent, to close at $52.15 Wednesday following the news, well below the $60 per share price of the buyout. In premarket trading Thursday, shares added 60 cents to $52.75.

Thomas Weisel analyst Mark Sproule said the selloff "presents a buying opportunity.

"While early confusion regarding contract breach may have given way to discussions of J.C. Flowers' intention, we believe that the limited legislative shift and preceding interest from competing bidders (last competing offer of $58.50 per share) will sustain outside interest in the market leading lender and create an attractive investment opportunity," he wrote in a note.

source:forbes.com