Student lender Sallie Mae said on Monday it has filed a lawsuit, seeking damages of $900 million, against the consortium that agreed to buy it for $25 billion but then proposed to revise its offer.
The suit seeks a declaration that Sallie Mae may terminate the merger agreement and collect the damages, that the buyer group has repudiated the merger agreement, and that no material adverse effect has occurred.
The consortium of private equity firms J.C. Flowers & Co and Friedman Fleischer and Lowe and major banks JP Morgan Chase & Co and Bank of America Corp agreed in April to pay $25 billion, or $60 per share, for Sallie Mae.
But since then, legislation slashing subsidies to student lenders and a serious credit squeeze have jeopardized the deal, with Sallie Mae shares trading way below $60. On Monday, the student lender's stock closed down 29 cents at $49.21.
The consortium has argued that Sallie Mae has suffered a material adverse effect and last week sent a revised proposal to the student lender offering to pay $50 a share in cash plus warrants that could result in an extra payout.
In the revised proposal, the consortium said if Sallie Mae performed in line with its own projections, the warrants could result in a payout of more than $7 per share, and if the student lender exceeded its projections, the payout could reach $10 per share.
The consortium's proposal to revise the offer was due to expire on Tuesday.
We regret bringing this suit, said Albert Lord, Sallie Mae's chairman. Sallie Mae has honored its obligations under the merger agreement. We ask only that the buyer group do the same.
The original buyout agreement has a breakup fee of $900 million, but if the buyers could prove the student lender has suffered a material adverse effect, they would not have to pay.
The buyers have argued the combined impact of the legislation and credit crunch would reduce the student lender's core earnings net income by 14.4 percent in 2009, and by 20.1 percent in 2012, when compared with assumptions provided by Sallie Mae.
The lawsuit filed by Sallie Mae rests on a fundamental misunderstanding of the terms of our contract, and is without merit, said a spokeswoman for the buyer group.
This is a dispute that should be resolved in the boardroom, not the courtroom.
On September 27, President George W. Bush signed student loan legislation that cuts federal subsidies to lenders such as Sallie Mae, Citigroup, Bank of America and many others.
If the Sallie Mae deal were to fail, 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.
Sallie Mae's lawsuit was filed in Delaware Chancery Court.