April 17, 2007 in Business

$25 billion deal takes Sallie Mae private

Associated Press The Spokesman-Review
 

WASHINGTON — A group of investors announced plans Monday to buy Sallie Mae, taking the nation’s largest student lender private in a $25 billion deal that comes as some regulators call for tougher standards and lower federal subsidies for the $85 billion college loan industry.

Private-equity firm J.C. Flowers & Co. and three other investors will pay $60 per share for the Reston, Va.-based SLM Corp., commonly referred to as Sallie Mae. The sale price represents a nearly 50 percent premium for Sallie Mae’s previously sagging stock before takeover rumors emerged late last week.

SLM shares traded up more than 17 percent on the New York Stock Exchange after the buyout was announced Monday.

J.C. Flowers and private-equity firm Friedman Fleischer & Lowe will invest $4.4 billion and own 50.2 percent of the company. Bank of America and JPMorgan Chase each will invest $2.2 billion and each will own 24.9 percent. The buyers will also provide Sallie Mae with $200 billion in backup financing.

John Oros, a managing director at J.C. Flowers, said the firm was drawn by Sallie Mae’s stock price, which had fallen to around $40 per share before takeover talks began. The investors also weren’t deterred by the brewing troubles for lenders and the prospect of a clampdown on the industry by lawmakers.

“We think Sallie Mae is a great company and a great business, and appropriate regulation will sort itself out in a way that will make this an attractive transaction for us,” Oros said.

Sallie Mae is by far the largest school lender, originating $23.4 billion in student loans last year, many of them federally subsidized such as widely used Stafford loans. The company has recently expanded into other areas of lending, such as debt collection and 529 college savings plans.

But it has also been subject to greater attention from lawmakers and regulators currently probing ties between lenders and college officials who guide students toward specific lenders for their loans.

Last week, Sallie Mae settled with New York Attorney General Andrew Cuomo over the company’s business practices, agreeing to pay $2 million to a student loan education fund. It will also no longer pay travel and entertainment expenses for university officials or send its employees to work for free in campus financial aid offices.

Citibank also agreed to a similar $2 million payment, and on Monday, San Francisco-based Education Finance Partners settled an investigation by Cuomo and agreed to pay $2.5 million.

Some Democratic lawmakers and even President Bush have threatened to cut federal subsidies to student lenders. Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, said last week that the buyout raised concerns about transparency at Sallie Mae.

Miller said in a statement Monday that given “the checkered past of Sallie Mae,” he and Congress would be interested “in learning more about how this new ownership will change their operations, and whether this is truly in the best interests of student borrowers and families who are working extremely hard to pay these loans back.”

Senate Education Committee Chairman Sen. Edward Kennedy, D-Mass., has pushed for lower the federal subsidies to banks that make student loans.

“Clearly, banks and investors see student loans as a very profitable business,” Kennedy said in a statement about the Sallie Mae sale. “Its more urgent than ever to enact reforms to our student loan system to ensure that students, not profits, are our top priority.”

Sallie Mae spokesman Tom Joyce said Monday that even though the company will be private, it will still be subject to federal and state lending laws, and it will continue to make filings to the Securities and Exchange Commission because it operates in the public debt market.

“We will have ample and sufficient transparency,” Joyce said.

There will also be little change in Sallie Mae’s corporate structure. Chief Executive Tim Fitzpatrick will continue in his post, as will the company’s top management. The company will remain in its Reston headquarters, and no job cuts are expected, Joyce said. Student borrowers and institutions will see no change in the way loans are handled or processed, he said.

Sallie Mae’s lending business will be kept separate from Bank of America and Chase, which will continue to operate their own, competing student loan arms.

Sallie Mae’s board unanimously approved the deal, which was signed Sunday night. The transaction requires the approval of Sallie Mae’s stockholders and is subject to regulatory approvals. If approved, it is expected to close in late 2007.

Colin Blaydon, Director of the Center for Private Equity at Dartmouth’s Tuck School of Business said the Sallie Mae sale was the sixth largest private equity deal since 2006. Sallie Mae’s low stock price made it a ripe target for a takeover despite the industry’s woes, he said.


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