The New York Times-20080128-Sallie Mae Settles Suit Over Buyout That Fizzled

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Sallie Mae Settles Suit Over Buyout That Fizzled

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Sallie Mae, the embattled student lending giant, reached a settlement on Sunday over its scuttled $25 billion buyout, ending months of legal fighting that had cast a cloud over the company, according to people briefed on the agreement.

The company, formally known as the SLM Corporation, agreed to settle with its onetime buyers, which include the private equity firm J. C. Flowers & Company, JPMorgan Chase and Bank of America, in exchange for a deal to refinance about $30 billion in debt that was due next month.

Both Sallie Mae's lawsuit and the buyers' counterclaims will be dismissed, and the merger agreement has been terminated, these people said. A trial in Delaware Chancery Court had been scheduled for December of this year.

A spokesman for Sallie Mae declined to comment, as did a spokeswoman for the buyers' consortium.

The announcement concludes one of the bitterest legal fights to emerge from the end of the buyout boom. After a two-year feast in which private equity firms gobbled ever-larger targets, a handful of deals have collapsed, but few disputes became as heated as that between Sallie Mae and its buyers, whose $60-a-share deal collapsed shortly after its announcement last April.

Securing the $30 billion credit line solves one of Sallie Mae's biggest problems and will very likely serve as a vote of confidence on the company's prospects. Since the near shutdown of the credit markets last summer, the company has been unable to issue new debt that is backed by its student loans, depriving it of a huge source of capital. As a result, it drew down its credit line, which had been provided by JPMorgan and Bank of America as part of the buyout deal.

The company also has suffered financially from the deteriorating economy. It reported a $1.6 billion loss for its fourth quarter after preparing for a jump in student loan defaults. It also took a hit from bad bets on its stock price, which it settled by issuing $3 billion in new capital.

Sallie Mae's stock has plummeted more than 56 percent over the last year, and closed at $19.88 on Friday.

A settlement will end a war of words between Sallie Mae and its former buyers over a $900 million breakup fee, which Sallie Mae sought after arguing that the consortium illegally scuttled the deal. The buyers claimed that new legislation to cut federal subsidies to student lenders had substantially harmed the company's financial health. By exercising an escape hatch in the deal agreement, known as a material adverse effect clause, the buyers tried to walk away without paying the $900 million fee.

Had the buyers been forced to pay, the brunt of the fee would have been borne by J. C. Flowers, a firm far smaller than its two bank partners.

Relations between the two sides had become so toxic since last summer that they refused to talk to each other for months, a situation that only worsened as Sallie Mae's chief executive, Albert L. Lord, took a hard-line stance in negotiations. Under Mr. Lord's guidance, the company rejected a revised buyout offer that would have paid $50 a share and potentially more if the lender met or exceeded its financial targets.

A thaw began earlier this month when the company appointed Anthony P. Terracciano, who turned around struggling financial firms like Dime Bancorp and First Fidelity Bancorp, as chairman, and John F. Remondi as chief financial officer. Mr. Remondi reached out two weeks ago to James B. Lee Jr., JPMorgan's vice chairman and senior rainmaker, people briefed on the matter said. Mr. Lee, who has already played the role of peacemaker in several challenged deals this year, led the consortium's efforts to reach an agreement, these people said, and brought Gregory L. Curl, a vice chairman at Bank of America, into the settlement discussions.

JPMorgan and Sallie Mae have a long history; they ran a joint student loan venture for nearly 10 years, though it was dissolved in 2005.

As recently as last Wednesday, when Sallie Mae held its annual shareholder meeting, Mr. Remondi said the company was very, very close to refinancing the credit line. At the time, he said that the company had been holding discussions with more than 10 potential partners.

JPMorgan and Bank of America will take the lead in offering the new financing, worth about $31 billion and good for 364 days. Others involved in the financing are Barclays Capital, Deutsche Bank, Credit Suisse, the Royal Bank of Scotland and UBS, Sallie Mae's banker in the failed buyout. J. C. Flowers is expected to contribute tens of millions of dollars into the deal, the people knowledgeable about the settlement said, although they refused to provide exact figures.

Sallie Mae is expected to pay an interest rate of about 4.5 percent.

With its financing and buyout-related legal issues settled, Sallie Mae can now focus on its other pressing issues. Chief among those is stemming potential losses from student loan defaults. The $1.6 billion loss it reported last Wednesday included a $575 million loan-loss provision.