A Premium Bid for Sallie Mae

The student loan provider has agreed to a buyout by an investor group. However, the deal already has its skeptics

By The Associated Press, with BusinessWeek staff

Lending money to college students, it turns out, can be an awfully lucrative business. On Apr. 16, Reston (Va.)-based Sallie Mae said that it agreed to sell the company to a group of investors for about $25 billion, a hefty premium of about 50% over where the company's stock was trading before takeover rumors lifted it last week.

The investor group led by private equity firm J.C. Flowers & Co. will pay $60 per share for the the nation's largest student loan provider. J.C. Flowers and private equity firm Friedman Fleischer & Lowe will invest $4.4 billion and own 50.2% of the company, and Bank of America (BAC) and JPMorgan Chase (JPM) each will invest $2.2 billion and each will own 24.9%.

Shares of SLM Corp. (SLM) (the formal name for Sallie Mae) were up 15% on Apr. 13 on rumors of the deal. The stock closed at $46.76 that day on the New York Stock Exchange, where shares have traded in a 52-week range of $40.30 to $55.21. On Apr. 16, share prices went up another 18% in mid-day trading, to $55. (For a video of BusinessWeek's Adrienne Carter discussing the deal, click here.)

Sallie Mae's independent board members have unanimously approved the agreement and recommend that its shareholders approve the agreement.

"Strategic Benefits Are Unclear"

Upon the deal's closing, Sallie Mae's current management will continue to lead the company. Sallie Mae will continue to originate student loans under its internal brands and will remain headquartered in Reston. Last year, it originated $23.4 billion of student loans. "This is an exciting new chapter in Sallie Mae's history," said Tim Fitzpatrick, the company's chief executive, in a prepared statement.

Chase and Bank of America also will continue to operate their independent student lending businesses. The banks have committed to provide debt financing for the transaction and to provide additional liquidity to Sallie Mae before the closing date, subject to customary terms and conditions.

Standard & Poor's (MHP), in a research note, expressed skepticism about the benefits of the deal for the two banks. "The strategic benefits are unclear as neither bank will have managerial control, and revenue synergies do not appear to be well-defined," wrote analysts Tanya Azarchs and John K. Bartko. "Both of the banks are rivals in the student lending space, which complicates some of the issues of collaboration. Much of the eventual benefit will depend on the evolution of the value of SLM stock and whatever exit strategy the buyout firm, J.C. Flowers & Co., may have for its 50.2% controlling interest."

UBS Investment Bank (UBS) acted as lead financial adviser to Sallie Mae.

Industry Under Scrutiny

The transaction requires the approval of Sallie Mae's stockholders and is subject to required regulatory approvals. The deal, if approved, is expected to close in late 2007.

The agreement comes amid closer scrutiny of the student loan industry. New York State Attorney General Andrew Cuomo has been investigating kickbacks by loan providers to school officials who steer students toward particular lenders.

Last week, Sallie Mae settled an investigation by Cuomo. It promised to alter its business practices and stop offering perks to college employees. It also agreed to pay $2 million into a fund to educate students and parents about the financial aid industry.