New Flowers for Sallie Mae

Last week, buyout pros were talking about Sallie Mae in the same breath as Harman International (i.e., dead deal). Today, the comparison may be closer to Home Depot Supply (i.e., living deal, lower price).

J.C. Flowers announced earlier today that its consortium has submitted a revised proposal to Sallie Mae’s board of directors, which would lower the up-front payment from $60 per share to $50 per share. It would also include warrants that could ultimately make up the difference — $7 per share if Sallie Mae hits its own performance targets, or a full $10 per share if it significantly exceeds them.

In its letter to the Sallie Mae board, J.C. Flowers said: “Our 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, and a significant premium to the company’s likely unaffected share price based on historical trading ranges and current market conditions. It also includes an extraordinary level of funding for the Sallie Mae business, which provides substantial value to Sallie Mae shareholders who will now be participating directly in the success of the company through their ownership of the warrants.”

Shareholders initially seemed to agree, as Sallie Mae (NYSE: SLM) rose over $51 per share in early-afternoon trading. But the skeptics returned nearly as fast, as the price has since gone back down to below $50 per share.

None of these most recent fluctuations are terribly severe, but likely reflect two concerns: (A) Does the earn-out arrangement create a disincentive for Flowers to hit certain targets? (B) Even if not, the leverage structure likely means that Flowers would need to improve Sallie Mae’s equity value by far more than 20%, before shareholders get their own 20%/$10 per share. In other words, heads Flowers wins – tails, Flowers wins.

For its part, Sallie Mae is not yet budging on its public insistence that Flowers and its partners honor their original offer. But, like with Home Depot, expect that stubbornness to subside.