A $25 billion takeover of Sallie Mae was on the verge of collapse on Wednesday after the student lender said a consortium does not expect to complete its planned acquisition on the agreed terms.
If the deal fails, it would be the latest casualty among a series of proposed leveraged buyouts to falter following the meltdown in credit markets over the last couple of months.
But it was still unclear whether the deal would unravel entirely, as consortium leader J.C. Flowers suggested the buyer group was willing to renegotiate at a lower price.
A consortium of Bank of America Corp, JPMorgan Chase & Co and private equity firms J.C. Flowers & Co and Friedman, Fleischer & Lowe agreed to pay $60 a share for Sallie Mae in April. But since then, legislation cutting subsidies to student lenders and a serious credit squeeze have jeopardized the deal.
Sallie Mae shares closed down 2.7 percent at $45.01 on Wednesday -- almost $15 below the agreed takeover price -- as traders bet a lower price is negotiated for the takeover or that the deal ends in litigation.
The consortium said that, as of Wednesday, conditions for the closing of the deal would not be met as a result of changes in the legislative and economic environment. The buyers said they were willing to discuss a revision of the transaction that reflects this new environment.
This summer's credit crunch and general skittishness about buyouts or exposure to leveraged debt would have compounded the group's reluctance to get involved with Sallie Mae and fit neatly with a general sense of buyer's remorse, said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.
President George W. Bush is expected to sign legislation on Thursday -- the College Cost Reduction and Access Act -- that sharply cuts subsidies to student lenders.
The Sallie Mae buyout has a breakup fee of $900 million, but if the buyers can prove the legislation causes a material adverse change (MAC) to the transaction, they would not have to pay.
The student lender maintains the new legislation does not constitute a material adverse change.
Sallie Mae said it measured the new legislation's impact against that of similar legislation described in its form 10-K and concluded the changes would reduce core earnings net income by only 1.8 percent to 2.1 percent annually over the next 5 years.
The student lender said it believes the buyer group has no contractual basis to renege on its obligations and that it intends to pursue all remedies available to it to the fullest extent permitted by law.
A court battle would certainly be entertaining for observers with no skin in the game, but it remains entirely possible that cooler heads may prevail and bring the parties back to the bargaining table, said Kathy Shanley, senior investment grade analyst at Gimme Credit.
(Additional reporting by Doris Frankel and Dan Wilchins)