The threatened buyout of student lender Sallie Mae may still go ahead -- but the $25 billion price tag could be negotiated down.

Sallie Mae said on Wednesday a group of private equity firms and banks threatened to scuttle their buyout of the company, blaming proposed legislation to cut government subsidies to student lenders.

The deal has a break-up fee of $900 million, but if the buyers could prove the legislation has a material adverse impact on the transaction, they would not have to pay the fee.

Bankers and lawyers are working hard to save the deal -- one of the biggest leveraged buyouts in history. If the transaction fell apart, it would be the most dramatic sign yet that a once-booming takeover market may be cooling.

I think there is a lot of posturing and it could become a legal mess, said securities lawyer Chip MacDonald of Jones Day. This is fodder that all lawyers, especially litigators, love.

Sallie Mae -- whose official name is SLM Corp. -- in April accepted a $60-a-share buyout from private equity firms J.C. Flowers & Co. and Friedman Fleischer & Lowe, as well as JPMorgan Chase & Co. and Bank of America Corp.

But on Wednesday, Sallie Mae said the buyers believe that current legislative proposals could result in a failure of the conditions to the closing of the merger to be satisfied.

Sallie Mae said it strongly disagrees with this assertion, and that it intends to proceed towards the closing of the transaction as quickly as possible.

Later that day, the U.S. House of Representatives voted to slash federal subsidies paid to college student loan companies. The Senate is considering similar legislation, while the White House has also proposed cutting student lender subsidies.

NERVOUS

While the Sallie Mae buyers blamed the proposed legislation, some analysts said the group may want an excuse to pull out or to negotiate a lower price given recent difficulties in raising financing in the debt market.

A collapse of the buyout could rattle financial markets already jittery from rising subprime mortgage defaults and the recent collapse of several hedge funds.

Nervousness has spread to the U.S. junk bond market, where a number of deals have been pulled. A robust market for high-yield bonds is crucial for financing leveraged buyouts.

I think that if the credit market conditions deteriorate further the banks along with J.C. Flowers may be looking for a price adjustment here, said John Orrico, portfolio manager at the Arbitrage Fund in New York.

I think the banks will drag this out as long as they can and wait and see what gets signed in terms of legislation, added Orrico, who estimates there is a 10 percent to 20 percent chance of Sallie Mae's buyers pulling out.

Sallie Mae, J.C. Flowers, JPMorgan Chase and Bank of America declined to comment.

Sallie Mae's shares fell almost 10 percent to $52.15 after the news on Wednesday, way below the $60 a share offer price. The stock ended the week at $53.64.

My assumption would be that probably they want to go through with the deal, said MacDonald. I think if the parties do get into a spat -- a deal this size, it will have some ramifications elsewhere.

Everybody will say it's the top of the market. This is where it ends. But this may be a very specialized case because of the legislative status of Sallie Mae and the student loan programs.

(Additional reporting by Kevin Drawbaugh)

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