Sallie Mae Buyout Threatened by Student Loan Legislation

Student loan giant and major ARM player Sallie Mae was informed yesterday that the proposed deal to acquire the company could be in peril in response to legislation passed by the U.S. House Wednesday.

The investment consortium, including Bank of America, JPMorgan Chase and equity investor J.C. Flowers & Co., said in a statement that the House proposal went too far in cutting subsidies to student loan lenders and could “result in a failure of the conditions to the closing of the merger to be satisfied.”

The consortium announced in April it would buy Sallie Mae for $60 per share, for a total purchase price of around $25 billion. Bank of America and JPMorgan would each take a 25 percent stake in Sallie Mae in the deal.

A number of analysts yesterday speculated that the notice could be a move by the consortium to negotiate a lower price on the deal. Sallie Mae’s stock dipped nearly 10 percent on Wednesday after the statement was made public, closing at $52.15, well below the $60 per share offer originally made by the consortium. The stock rebounded in early trading Thursday to $54.

“This is a development worth watching in the ARM industry,” says Mike Ginsberg, CEO of ARM advisory firm Kaulkin Ginsberg Company. “Right now, everything is very fluid; it will be interesting to see what impact this development has on Sallie Mae’s considerable collections operation.”

Sallie Mae responded in a statement that it was surprised by the consortium’s notice and that it would move forward on the acquisition. Sallie Mae (NYSE: SLM), the largest student loan lender in the country, is also one of the largest accounts receivables management companies. Sallie Mae’s debt collection revenue could exceed $250 million this year following several acquisitions of collectors.

The deal carries a $900 million breakup fee, meaning that the party of the deal that backs out will owe the other party the full breakup fee if the deal does not close.

The House proposal would cut in half the interest rate on government-backed student loans and reduce federal subsidies for student loan lenders. Keefe, Bruyette & Woods analyst Sameer Gokhale told the Associated Press that the proposal would trim Sallie Mae’s estimated 2008 earnings by about 35 cents per share.