Sallie Mae cuts forecast; shares sink
Shares of student lender Sallie Mae sank more than 10% on Wednesday after the company cut its 2008 profit forecast and said it failed to revive interest from an investor group that once offered to buy it for $25 billion.
The company’s weakening financial outlook could bolster the investor group’s legal argument that it should not have to pay a $900-million fee for walking away from the deal because of significant changes in economic or regulatory conditions affecting SLM Corp., Sallie Mae’s formal name.
The Reston, Va.-based firm, the nation’s largest student lender, lowered its earnings forecast for next year by more than 13%, citing a new law that reduced federal loan subsidies and the need to hoard cash to offset loans that are going bad.
The company’s shares tumbled $3.45, or 10.8%, to $28.49. That is more than 50% below the $60-a-share offer made in April by the investor group, which is led by private equity firm J.C. Flowers & Co. and includes Bank of America Corp. and JPMorgan Chase & Co.
“Deal dead,” declared analyst Matt Snowling at Friedman, Billings, Ramsey & Co. in a research note. In addition to reduced subsidies and higher loan defaults, Snowling said, Sallie Mae faces new competition from consolidators, or loan brokers.
Defaults are rising on student loans, and credit-market tremors similar to those linked to the mortgage crisis have begun to show up in the $85-billion student-loan market.
Last Friday, First Marblehead Corp., which packages student loans for sale to investors, said it would suspend that activity until at least next year.
Sallie Mae and the Flowers group have been feuding for months over terms of what would be one of the world’s largest private equity takeover deals, and the dispute has landed in court. A trial is expected to start late next year in Delaware Chancery Court.
The investor group maintains that a “material adverse effect” has occurred, and therefore it should not have to pay the breakup fee.
The reduced earnings forecast argues “in favor of a claim [by the investor group] that there’s a material adverse effect,” said Gregory Bishop, an attorney who specializes in banking law at Williams Mullen in Richmond, Va.
Sallie Mae on Wednesday trimmed its forecast for 2008 “core” earnings from $3.25 a share to a range of $2.60 to $2.80.
Still, Bishop said, “the tenor of Delaware courts has been to hold people to their deals. . . . It’s a better fact for Flowers than Sallie Mae, but I don’t know if it’s enough.”
Company executives said in October that they had received expressions of interest from other potential suitors, but no deal has emerged.
