Round two goes to Sallie Mae. The student lender did not budge on Tuesday, as the consortium that originally agreed a $25bn buy-out lobbed in a reduced offer.
Sallie Mae’s refusal to negotiate on the lower price – pitched at $50-a-share plus warrants – is risky. If the deal falls through, Sallie Mae will face a tougher financing environment; its credit rating is lower and it has no massive financing facility to fall back on, as was envisaged in the original deal. Still, it has plenty of liquidity and the government guarantee on its student loans means it can tap the securitisation market, albeit at somewhat higher spreads.
Furthermore, Sallie Mae could argue that the five-year warrants are not good enough, if it were in a loquacious mood – which it clearly is not, judging by Tuesday’s terse two sentence response. For one thing, once discounted back, the warrants would be worth less than the $7-a-share claimed by the buy-out consortium. For another, they are contingent on Sallie Mae’s performance, which – several years out – might not be within current management influence.
A subplot to this increasingly tense battle is whether the buying consortium will stay united in its belief that it has the legal upper hand and that there has been a material adverse change to Sallie Mae’s business that makes it not worth the original price. For now, there appears to be no difference of opinion. But the pressures on the buying parties are not the same. The risk to JC Flowers, should its consortium lose the legal argument, is surely greater than for the banks. The break-up fee is large at $900m, and so will be JC Flowers’ discomfort if it has to ask its limited partners to pay for their share. It is not clear what Sallie Mae can do to exploit this asymmetry of risk. But it will certainly try. Expect a few more rounds before a winner emerges from Wall Street’s best punch-up.