I’m expecting that there will be some sort of compromise on the Sallie Mae deal, since all of this huffing and puffing seems to be more about leverage than indignation. But, for the sake of column, let’s assume that the Flowers consortium walks away and is required to pay the $900 million breakup fee. The question at that point is: Who pays?
This might seem like a cut-and-dry question, but it’s not. In fact, more than a few J.C. Flowers LPs have told me that they’ve gotten little to no guidance on the subject (I posted one such email here). For starters, J.C. Flowers is the deal’s lead, but still is only contributing about half of the total. That means it would only be on the hook for around $450 million of the breakup fee, which is believed to be broken out with $200 million attributed to the general fund and the other $250 million attributed to co-investors.
If Flowers goes by the book, then limited partners in the general fund (which include Chris Flowers) are required to pay the full $200 million, while co-investors would be out the full $250 million. The former would just have their piece taken out of future fund performance, while the co-investors would actually have to cut checks. The only other option would be for Flowers to magnanimously agree to pay for his own mistake, which clearly is what LPs would prefer. But, as I said, there has not yet been any indication one way or the other.
The big problem here is that there isn’t much precedent. LPs have always been on the hook for reverse breakup fees – considered a broken deal expense – but there have been virtually no cases in which they’ve been triggered. In fact, the first one might be only occurring now, with Silver Lake Partners and ValueAct Capital backing out of an agreement to buy Acxiom.
The original Acxiom reverse breakup fee was $130 million, but the firms negotiated it down to $65 million. Then the lenders agreed to pay half, with the private equity firms just indebted a total of $32.5 million. I don’t know about ValueAct, but have been told that Silver Lake did require its LPs to cover their piece. Again, this comes out of performance (no checks getting cut) and is a relatively small amount of cash – but nonetheless might be something for Flowers to point to if Sallie Mae doesn’t work out.