Sallie Mae Sale May Be in Trouble

RENEE MONTAGNE, host:

And the deal to buy out Sallie Mae, the nation's leading provider of student loans, is in jeopardy. Last April, a group led by the private equity firm JC Flowers, along with two major banks, Bank of America and JP Morgan Chase, agreed to pay $25 billion for the company. With credit harder to come by, the buyers say they are unwilling to pay that price.

NPR's Wendy Kaufman reports.

WENDY KAUFMAN: The deal was expected to close next month. But Sallie Mae, like other student lending institutions, is about to see its subsidies cut, and that makes Sallie Mae less attractive financially.

Later today, President Bush will sign legislation that increases student aid but cuts subsidies to lenders by more than $20 billion over the next five years. The buyers say the new legislation triggers something called the material adverse effect clause in the buyout agreement. And yesterday they said they will not consummate the deal under the existing terms. Those clauses are sort of catchall if a deal turns sour before it closes.

UCLA law professor Stephen Bainbridge says courts have been reluctant to void deals based on them, but he says buyers use them to force sellers back to the bargaining table.

Professor STEPHEN BAINBRIDGE (UCLA): It's sort of an opening volley in saying, we want to rethink this deal. I would guess in this case, they don't really want to get out of the deal so much as they want the deal reworked so it's more favorable.

KAUFMAN: For its part, Sallie Mae says, it expects the buyers to honor their agreement and says if they don't, it intends to pursue all legal remedies available. But a renegotiated deal with a lower price tag seems more likely. If a deal can't be reached, the buyers would have to pay a $900-million penalty.

Wendy Kaufman, NPR News. Transcript provided by NPR, Copyright NPR.