Sallie Mae abandons buyout lawsuit

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From wire dispatches and staff reports

Sallie Mae yesterday agreed to drop its lawsuit against a group of investors who backed out of buying the student lender and received a commitment from seven banks to refinance $31 billion worth of its debt.

In dismissing the suit, Reston-based Sallie will part with an effort to obtain a $900 million breakup fee from the investment group led by private-equity firm J.C. Flowers & Co.

JP Morgan Chase and Bank of America, which were part of the investment group, are among the seven banks that put together the new financing for Sallie, formally SLM Corp.

The investment group in October dropped its proposed acquisition of the student lender for $25 billion, or $60 per share, saying that a new law cut billions of dollars in federal subsidies for student lenders such as Sallie and would adversely affect its earnings potential.

J.C. Flowers tried to renegotiate a cheaper deal, but Sallie, the nation's largest student lender, sued the group to force it live up to the terms of the original offer, which included the breakup fee.

Sallie Mae was likely to lose its court claim, because it had cited the lower government payments in the past few months when lowering its earnings estimates, said Matt Snowling, an analyst with Friedman, Billings, Ramsey & Co. in Arlington.

"With little chance of recovering any of the $900 million termination fee and the legal expenses involved, we believe the company did the right thing and secured funding, presumably at better terms, as a trade-off," Mr. Snowling said.

The other banks involved in the new financing plan include Barclays Capital, Deutsche Bank, Credit Suisse, Royal Bank of Scotland and UBS.

Last week, Sallie said it lost $1.6 billion in the fourth quarter as borrowing costs rose, and it set aside $575 million to cover bad loans.

Shares of Sallie, formally SLM Corp., rose 57 cents to $20.45.