An all out battle will soon be joined by Sallie Mae and its bankers on one side and the private equity firm of J.C. Flowers and its banks and co-investors J.P. Morgan and Bank of America.
At issue: the $60 per share price the Flowers group agreed to pay for Sallie, the big student loan company, last April totaling about $26 billion.
While Flowers has already made some noises publicly questioning whether that price should stand, the volume from both sides is likely to start rising rapidly, judging from some of the offline comments from participants in the deal.
While much has been made of the new federal legislation that regulates Sallie Mae, there seem to be multiple lines of attack that Flowers and his banks will seek in trying to make a case for a renegotaion of the deal.
Chief among them is not just the legislation, which they maintain is worse for Sallie Mae than had been anticipated, but also the change in the credit markets, which will make it more expensive for Sallie to fund itself.
J.P. Morgan and Bank of America are each providing $2.2 billion toward the purchase for a 24.9% stake each. But perhaps even more importantly, they are building a new capital structure around the company that ensures it will be adequately funded as it moves to a more leveraged state. That structure includes $28 billion in conduit financing and a seven-year asset purchase agreement.
The banks seem intent on making that finacing a point of contention as well as the changes that will hit Sallie Mae from the legislation.
Still, it's far from clear that either the legislation or changes in the credit market constitute a material adverse change. As one person close to Sallie Mae said: "when you buy a finance company, you take on the risk of owning a finance company."
But that's not going to stop the flowers side from trying hard to keep this stock down and gird for a renegotions of the terms of the deal.
It is the banks hope that Sallie Mae will end up with a renegotation similar to what took place at the sale of Home Depot's supply business.
As one banker said: Right now the markdown on the Sallie Mae acquisition financing--about $16 billion--is far higher than the $900 million breakup fee.
But would two of the nation's premiere financial instituions really breach a deal? Stay tuned. As of next week, the real action may start.