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Sallie Mae’s former buying consortium headed up by JC Flowers remains interested in pursuing a take-private of the largest student lender despite ongoing litigation between the parties, two sources close to the Flowers consortium told dealReporter.
Communication between the Flowers buying group - which consists of JC Flowers, Bank of America, and JPMorgan - and some of Sallie Mae’s top shareholders was said to have been sparked in hopes of rekindling a deal, the first source and a person on the Sallie Mae side concurred.
Still, the likelihood of realizing a deal, said the first source, hinges on whether the student lender’s executive chairman, Al Lord, as well as its board of directors, would be willing to negotiate a rational premium to the stock’s current trading value of around USD 37. If this could be achieved, the source said, something might get done. Sallie Mae will not see a trial over the break-up of its agreed USD 25bn sale to Flowers until July at the earliest, according to recent news reports. The company, which wants the USD 900m breakup fee as part of the merger proposal, wanted the trial to start in February, noted the reports.
Investors are acting as a go-between in an attempt to restore ties between the Flowers consortium and Sallie Mae by year-end, the first source said. However, he cautioned that there are no guarantees despite investor hopes. As 2007 draws to a close, the first source noted that investor compensation packages are on the line, and could be the cause of mounting pressure to strike a deal.
Asked if serious conversations could occur by year end to position a potential transaction for 2008, the source said only that, ”to the extent [that Sallie Mae is] being rational.” If the company is unwilling to negotiate on a reasonable level, he said the consortium could live without owning the company.
But if a USD 55 per share concession advocated by shareholders continues to be regarded as ”not the right price” - as conveyed by Lord to investors at a conference in October - then the source said he did not see a deal happening.
In addition, the first source compared the argument used in favor of Flowers’ revised USD 50 cash and up to USD 10 warrants offer in relation to Lord’s new compensation package. On 26 November, Sallie Mae’s independent board members approved Lord’s compensation package for his service as executive chairman for a two-year period. The package consisted of an annualized cash compensation and a stock appreciation right with an exercise price for the award set at USD 46 per share of Sallie Mae stock; a number the filing claims is a ”substantial premium” to USD 36.87 per share, which was the company’s trading price at the time the filing was made.
Nearly concurrent with the filing that detailed Lord’s compensation package, market rumors have circled claiming Flowers could place a USD 50 per share proposal for Sallie Mae. However, the source said the chatter was ”nothing official,” adding that it was a result of shareholders attempting to reinstate Flowers’ former revised offer.
A person on the Sallie Mae side also acknowledged the market rumors, but said Sallie Mae had not received anything from Flowers. In terms of accepting a deal at USD 50 per share, the person only said ”maybe.” Further, the person commented that perhaps the rumors had surfaced in lieu of the former buyers catching wind that outside parties had again been showing interest in Sallie Mae.
Other potential Sallie Mae suitors were said by the person to be positioning themselves for better market conditions so as to avoid having to ”sit back and do six weeks of due diligence.” Exploratory conversations with alternative suitors have been made over the last few weeks, the person said, in order to align buyers for when the credit market turns around, he added.
And yet despite the additional interest in the company, the person said that the field of interested and capable suitors for Sallie Mae had grown smaller. Citigroup, he said, would have been considered a player in the past, but due to obvious credit concerns and possible USD 13.7bn in write downs, the investment firm is not considered a buyer at present time.
Should the Flowers consortium not acquire Sallie Mae, the first source said any other suitor is unlikely to make the deal a reality in the next 12 to 18 months. Any new potential suitor would be hard pressed to find two major banks willing to finance this transaction at the tail end of the credit crunch, the first source said. Lord has been public that he wants the company to eventually be private, and has a two-year window to do just that, the person noted.
Blackstone, said the first source, had been a strong competitor of the Flowers consortium during the original auction for Sallie Mae. The private equity giant, he said, had also aligned itself with banks to fund the deal, namely Merrill Lynch and Citigroup. However, he said it would be unlikely that either of these banks could muster up the financing for a deal, after both institutions recently took massive hits to their fixed income departments.
Still, an industry banker following the situation noted that the two most sophisticated buyers for a complex financial business like Sallie Mae would be Flowers and private equity behemoth TPG. And yet although he said it remained possible that TPG could look at the company, he did not believe another financial sponsor or sponsor group would come together to do a deal on a new money basis.
Further, the person, the second source, and the industry banker independently said that Flowers was the best buyer for Sallie Mae. The reason Sallie Mae chose the Flowers consortium as its buyer was it felt the members of that buying group could get the deal closed, the person said. ”There was another suitor who was very attractive but the issue was we didn’t trust the financing as much,” the person said, adding personalities aside, referring to Lord and Christopher Flowers, the Flowers consortium remains the best.
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