A Suitor for Sallie Mae?

Shares jumped Friday after a press report that student-loan outfit SLM is in talks for a $20 billion private-equity buyout

Would being a private company lend Sallie Mae a hand amid greater government restrictions on the student loan biz? According to an Apr. 13 press report, SLM Corp. (SLM), the largest originator of federal student loans, is in talks about a more than $20 billion private equity buyout

Investors bought the Reston, (Va.) company's shares after the New York Times reported the news, after having worried during recent months about how increased scrutiny from regulators might affect Sallie Mae's business.

One potential bidder is the Blackstone Group, Times reported, citing people briefed on the discussions. The newspaper added that it could not learn the names of other potential bidders and it remained unclear that a deal would be reached.

Blackstone spokesman John Ford declined comment. "It's been our longstanding policy not to comment on marketplace rumors or speculation," Sallie Mae spokesman Tom Joyce said.

Despite the lack of official confirmation, investors bid up Sallie Mae's stock by 11.2% to $45.30 per share in early trading on the New York Stock Exchange.

"With the possible advent of stricter student loan regulations, SLM likely expects it would have greater flexibility as a private company," Standard & Poor's equity analyst Stuart Plesser said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) "We are wary that SLM's business model could come under serious pressure from regulation."

As New York State Attorney General Andrew M. Cuomo investigates student lending industry conflicts of interest nationwide, Sallie Mae agreed to contribute $2 million to a fund devoted to educating college bound students about their loan options and to adopt Cuomo's code of conduct governing student lending, according to a statement from the Attorney General on Apr. 11. Sallie Mae promised to stop doing things such as paying financial aid officers for appearing on advisory boards.

The company's shares have fallen more than 7% since the Democrats took control of Congress last fall, as investors worried that the newly left-leaning House and Senate might not be as friendly to student lenders. The House of Representatives already passed a measure on Jan. 17 that would trim rates on need-based subsidized federal student loans by 50% over a five-year period (see BusinessWeek.com, 1/17/07, "Relief for Student Borrowers?"). While the Senate had yet to decide on the matter, even President George W. Bush indicated in his Feb. 5 proposal for the fiscal year 2008 budget that he might support such a move.

Investor concerns about regulators have not necessarily daunted private equity firms during recent months. For example, Simon Property Group (SPG) and Farallon Capital Management said Feb. 5 that they would offer around $1.56 billion for Mills Corp. (MLS) -- even as the shopping-mall operator grappled with problems ranging from a looming debt burden to a Securities and Exchange Commission investigation into the company's accounting.