Sallie Mae “Buyers” Hit Back

ASHINGTON (AP) – The investor group that seeks to walk way from a $25 billion buyout of student lender Sallie Mae told a Delaware court on Monday that it should not have to pay the $900 million breakup fee stipulated in the agreement.

The legal maneuver by the investor group led by private equity firm J.C. Flowers & Co. came as a quick counterpunch to Sallie Mae's effort on Friday to get the court to expedite its lawsuit on the disputed deal.

Earlier last week, Sallie Mae, formally known as SLM Corp., sued the investor group to force them to complete the deal at the original $60-a-share cash price.

The investor group, which includes Bank of America Corp. and JPMorgan Chase & Co., claims that student-loan legislation recently signed into law by President Bush, and weaker economic conditions, have made the price agreed upon in April unacceptable. The group briefly offered to pay $50 a share in cash, plus other incentives, but that proposal expired last Tuesday.

Sallie Mae's chairman said last week that the student lender has been contacted by other investors potentially interested in acquiring it.

“We get calls,” Chairman Albert Lord said during a conference call that followed the release of the company's third-quarter results, a loss of $344 million.

The investor group's latest legal step came in a letter sent to Vice Chancellor Leo E. Strine Jr. of Delaware Chancery Court. In it, the investors said they were “prepared to eliminate any concern that Sallie Mae has” by terminating the merger agreement and thereby freeing the company from the conditions and restrictions “of which it complains.”

The investors also disputed Lord's assertion last week that the uncertainty over the merger deal has impeded Sallie Mae's ability to run its business.

Spokesmen for Reston, Va.-based Sallie Mae didn't immediately return a telephone call seeking comment.

Sallie Mae's third-quarter loss, equivalent to 85 cents a share, compared with profit of $263 million, or 60 cents a share, in July-September of 2006.

The company said its income was reduced during the period by $28 million as a result of the cut in subsidies under the new student-loan law and by $18 million for expenses related to the merger agreement with the Flowers-led investor group.

By taking a one-time charge to account for the legislation's financial impact, Sallie Mae could bolster its legal argument — that the new student-lending law does not represent a significant long-term detriment to its business, as J.C. Flowers and its partners contend.

The group maintained in its letter Monday that the law will cut Sallie Mae's core income by an estimated $316 million, or 15.2 percent, in 2009, and $595 million, or 23.5 percent, in 2012.

SLM shares fell $1.45, or 3 percent, to $47 in midday trading.