NEW YORK - Sallie Mae said yesterday it is suing the investor group that had offered to acquire the nation's largest student lender, in order to force the buyers to go through with their original $25 billion deal or else pay a $900 million breakup fee.
The buyers group, led by private equity firm J.C. Flowers & Co. and including Bank of America Corp. and JPMorgan Chase, has said student loan legislation signed into law by President Bush last month - and weaker economic conditions - made the $60-a-share price agreed on in April unacceptable.
The group sent a revised offer of $50 per share to the board of the company, formally called SLM Corp., last week and had given Sallie Mae until today to decide whether to accept the revised offer, worth about $21 billion.
Sallie Mae responded with a terse statement, saying it expected the buyers to honor their contract.
The lawsuit, filed yesterday in Delaware Chancery Court, seeks a declaration that the buyers have violated the merger agreement, and that no "material adverse effect" has occurred that would allow them to walk away from the deal without paying the breakup fee.
"Sallie Mae has honored its obligations under the merger agreement," Sallie Mae Chairman Albert L. Lord said in a statement. "We ask only that the buyer group do the same."
J.C. Flowers spokeswoman Stephanie Cutter responded, saying the suit was meritless: "This is a dispute that should be resolved in the board room, not the court room."
Sallie Mae said it notified the buyer group Wednesday that all conditions to closing the deal had been satisfied, and Nov. 5 had been set as the closing date, but Sallie Mae received a letter from the buyer group yesterday disputing that, in part because the buyers claim there has been a materially adverse effect.
The new student loan law cuts about $20 billion in federal subsidies to companies like Sallie Mae that make student loans while halving the interest rate on government-backed student loans. According to Sallie Mae, the new loan law will reduce its earnings between 1.8 and 2.1 percent each year over the next five years.
The buyers group forecasts a cut in profits of 14.4 percent in 2009 and 20.1 percent in 2012.
Sallie Mae, based in Reston, Va., has maintained that the anticipated reduction in earnings does not rise to the level of significance of a materially adverse effect.
For months, the drama around what could be one of the world's largest private-equity takeover deals has been punctuated by rancor and disputed claims between the two sides. In the time since the original deal was struck in April, the once-booming private-equity industry has stumbled as an acute squeeze in credit markets has caused investors to balk at financing big deals.
Buyout firms like J.C. Flowers - which acquire public companies and take them private, restructure them and then sell them a few years later at a profit - had been riding a wave of easy credit but recently have found it harder to persuade their bankers to finance takeovers.
Cerberus Capital Management LP in July had to inject more equity into its takeover of Chrysler Group from DaimlerChrysler AG. More recently, The Home Depot Inc. lowered the sale price on its wholesale supply unit by 17 percent to complete its sale to private-equity firms. And two firms backed out of their $8 billion buyout of upscale audio equipment maker Harman International Industries Inc.