Sallie Mae Sale Now In Jeopardy

[Nov 1, 2007.]

It appears that the proposed sale of student lender Sallie Mae is now at risk.  The news comes in the wake of reports that the investor group objected to the terms of the sale.

Meanwhile, Sallie Mae may go to court to resolve the situation.

The student loan giant said in a written statement that it "firmly believes that the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to it to the fullest extent permitted by law."

At issue is a new student loan bill which would lead to a $20 billion reduction in government subsidies to companies including Sallie Mae.  The legislation would also reduce by half the interest rate on government-backed student loans.

Meanwhile, shares of Sallie Mae declined $1.24 in the aftermath of the collapse of the bailout plan.
The Flowers firm, which is part of the investor group, issued a statement saying that the investors think "that the conditions to closing under the merger agreement, if the closing were to occur today, would not be satisfied as a result of changes in the legislative and economic environment.  We have told representatives of the Sallie Mae board that we are open to discussing a revision of the transaction that reflects this new environment."

Sallie Mae has stated that the new student loan bill would cut its core earnings net income as much as 2.1% each year over a 5-year period.

Observers note that Sallie Mae appears to be eager to go to court over the collapse of the deal.  However, it's unclear how likely it is that the lending giant will win its dispute.  That's because the case appears to have no precedent, so there is no indication of how the courts would rule.

Still, Sallie Mae recorded an encouraging 3rd quarter, thanks to a large number of new loans and a $100 million drop in writeoffs for defaults on loans not backed by the government, also known as private student loans.

Julie Ann Amos
November 1st 2007

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