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The JC Flowers Consortium is understood to remain committed to the proposed takeout of Sallie Mae. However, if the consortium should choose to walk away from the deal, a source familiar with the situation said it is unlikely weakening credit markets would cause the departure.
On 15 April, Sallie Mae announced that JC Flowers along with private equity firm Friedman Fleischer & Lowe would invest USD 4.4bn and own 50.2% of the company, and Bank of America as well as JPMorgan each will invest USD 2.2bn and each will own 24.9% of the company.
According to the source, despite the volatility of credit markets, JPMorgan and Bank of America are committed to realizing this deal at the proposed price. Due to the amount of equity contributed by the acquiring banks, the source said the deal is expected to continue moving forward virtually undisrupted by the lending market.
The risk profile of this deal in the credit matrix was said to be significantly different than that of other companies attempting a LBO, as JPMorgan and Bank of America are lead investors contributing substantial equity to the transaction, not solely debt providers.
Unlike traditional backers, JPMorgan and Bank of America cannot choose to walk away from the deal independent of JC Flowers and Friedman Fleischer, the source noted. Unless the consortium decides to exercise its right to pay the USD 900m break-up fee to free itself of the agreement, the banks are unable to bail on their equity contributions.
Further, the source said the consortium may still walk away from the deal, but if it does, it will likely be in relation to pending legislation that could seriously alter the conditions of the proposed merger. However, it was said that the legislation currently in Congress is not dramatically different from the proposals that were referred to in the deal contract.
This news service previously reported that Rep. George Miller (D) of California and Sen. Edward Kennedy (D) of Massachusetts had each recently presented bills to Congress with propositions to tighten restrictions on the student lending market. Kennedy, it was reported, unveiled a proposal attacking the kickback schemes and conflicts of interest that have been under investigation in the USD 85bn student lending industry, focusing chiefly on payments and gifts to college officials by lenders in exchange for being placed on preferred lender lists.
On 31 July, Sallie Mae’s stock closed at USD 49.17 down USD .39 or .79%.
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