SALLIE SUES FLOWERS OVER $25B BUYOUT
The battle between billionaire J. Christopher Flowers and Sallie Mae appears headed for a courtroom showdown after the nation’s largest student lender filed a lawsuit late last night in Delaware court seeking $900 million in damages for breach of the $25 billion takeover deal signed earlier this year.
The suit comes after Flowers and his partners at Bank of America and JPMorgan Chase sent a letter to Sallie yesterday claiming the company has suffered a “material adverse effect” under the terms of the merger agreement, which would allow them to walk away from the transaction without having to pay the $900 million break-up fee. The Flowers groups also states that it has not received updated financial projections and other information that are required to finance the deal.
The letter was in response to a letter from Sallie’s board on Oct. 3 setting a Nov. 5 deadline for Flowers to close the buyout.
The Flowers group also expressed frustration yesterday that Sallie and its chairman Albert Lord have refused to meet or negotiate with them since they first questioned the impact of new federal student loan legislation on Sallie?s business. The new legislation, which cuts federal subsidies for student lenders, was signed recently into law by President Bush.
“It would be easier to discuss these matters in person rather than through an exchange of letters,” the Flowers group said in the letter. “We also would welcome the opportunity to meet with management to discuss our proposal and review the Company’s projections so that we can better understand its views of the values in the Company and the strength of its business plan.”
Lord and the rest of Sallie’s board has been adamant that no MAE has occurred under the merger agreement and Flowers is compelled to close the deal at the $60 per share price or pay the $900 million fee. Last week, Flowers submitted a lower offer of $50 a share plus warrants that would pay off based on the performance of the company’s business in five years.
“We regret bringing this suit. Sallie Mae has honored its obligations under the merger agreement. We ask only that the buyer group do the same. We are prepared to close under the contract the parties signed in April,” Lord said in a release yesterday.
“The lawsuit filed by Sallie Mae rests on a fundamental misunderstanding of the terms of our contract, and is without merit. This is a dispute that should be resolved in the board room, not the court room,” a spokeswoman for the Flowers group said last night.
Wall Street experts who have followed Sallie saga since Flowers appeared to back away from the deal in July, are divided about whether an MAE has occurred. “I am surprised at the lawsuit, but I really never thought Sallie Mae had a good case because they have never quantified publicly whether or not an MAE has occurred and they have actually stated that the effect of the new legislation is more than they originally projected,” said Steven Davidoff, a law professor at Wayne State University who has followed the deal closely.
“Clearly, Flowers has a lot of confidence in this case,” Davidoff said. “But, at the end of the day, this could be a negotiating tactic by Sallie to get Flowers to increase his earlier offer.”