Group revises offer to buy Sallie Mae

The consortium that agreed to acquire Sallie Mae said Tuesday that it had sent a revised proposal to the student lender offering to pay $50 a share in cash plus warrants that could result in an extra payout.

But Sallie Mae responded by saying it expected the buyers to honor their original contract.

The group had agreed to pay $60 a share, or $25 billion, for Sallie Mae in April. Since then, legislation slashing subsidies to student lenders and a serious credit squeeze have jeopardized the deal.

Private equity firm J.C. Flowers & Co. said it sent the revised proposal on behalf of the consortium, which also includes JPMorgan Chase & Co., Bank of America Corp. and private equity firm Friedman Fleischer & Lowe.

In the revised proposal, the consortium said that if Sallie Mae performed in line with its own projections the warrants could result in a payout of more than $7 a share and that if the student lender exceeded its projections, the payout could reach $10 a share.

“I think Sallie was probably looking for closer to $55, but you do have the sweetener if the business is going well . . . you should get about $57,” said Richard Hofmann, an analyst at CreditSights. “I think they [Sallie Mae] might try to come back and get more cash.”

The consortium said its proposal to revise the offer would expire Oct. 9.

“This revised proposal offers full and fair value to the Sallie Mae shareholders in light of the changes that have occurred since the signing of our agreement,” Christopher Flowers, managing director of J.C. Flowers, said in a letter to Sallie Mae’s board.

On Sept. 27, President Bush signed student loan legislation that cuts federal subsidies to lenders such as Sallie Mae, Citigroup, Bank of America and many others.

If the Sallie Mae deal were to fail, it would be the latest casualty among numerous proposed leveraged buyouts to falter after the meltdown in credit markets over the last couple of months.

Sallie Mae shares closed up 19 cents at $50.09.