Another One Bites The Dust?

Chris Flowers and his banker buds have bailed on their $25 billion buyout of Sallie Mae. Now the fight is on for $900 million in breakup fees, and the likeliest venue is a Delaware courtroom.

J.C. Flowers and Sallie Mae had agreed on the $60 per share deal back in April, with additional equity commitments coming from Friedman Fleischer & Lowe, J.P. Morgan Chase and Bank of America. All seemed well and good, save for some carping from the SEIU and other interest groups that didn’t necessarily approve of a buyout shop being in charge of the nation’s largest student lender.

All well and good until Congress got involved, that is. A bill was recently passed that would cut in half the interest rate on government-backed student loans — and paid for by slicing $19 billion of federal subsidies given to lenders like Sallie Mae. In addition, the legislation would cap the amount a student borrower is required to repay each year.

President Bush is expected to sign the bill into law tomorrow, which prompted the Flowers-led pullout.

At issue now, however, is whether or not the legislation represents a material adverse change (MAC) to the original buyout agreement. If so, it’s a clean break. If not, the buyers owe Sallie Mae a cool $900 million. Can you guess which position each side is taking?

In a statement, Sallie Mae said the following: “Sallie
Mae firmly believes that the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to it to the fullest extent permitted by law.”

I’m not even going to pretend to know if this bill should trigger the MAC, so instead will send you over to the M&A Law Professor Blog. He’s currently on vacation, but posted this two weeks ago.