Sallie Mae sends Flowers to court

Sallie Mae has received expressions of interest from buyers other than J.C. Flowers, company Chairman Albert Lord said during a quarterly earnings call last week. Lord did not provide any specifics, including whether buyers would be willing to meet the $60 per share price that Flowers has since walked away from.

The terms of the company’s buyout agreement with an investor group led by private equity firm Flowers prohibit such activities.

Nevertheless, as the dispute with the investor group plays out, Lord said that Sallie Mae has received expressions of interest from other possible buyers.

“We get calls,” Lord said. “I’m actually not allowed to talk about them.”

Meanwhile, Sallie Mae reported a third quarter loss of $344 million. It blamed the weaker than expected results in part on the effect of new student loan legislation that reduces by $20 billion the federal subsidies to student lenders and soured its would-be buyers on the transaction, which is now being fought in court.

“We’ve got to sort out this merger mess. It’s gone on too long,” Lord said. “It ties our hands on day-to-day activities.” Until the dispute is resolved, he said, Sallie Mae cannot negotiate with other potential buyers, pursue its own potential acquisitions or buy back shares.

Days before the conference call, Reston, Va.-based Sallie Mae sued the investor group, which also includes Bank of America Corp. and JPMorgan Chase & Co., for attempting to back out the $60 a share cash offer for the company. The investors say that the federal student loan legislation, recently signed into law by President Bush, coupled with weaker economic conditions, have made the price agreed upon in April unacceptable. A reduced cash offer of $50 a share expired last week.

In the lawsuit that Sallie Mae filed Delaware Chancery Court, the company seeks a declaration that the buyers violated the merger agreement, and that Sallie Mae should receive the $900 million breakup fee because no “material adverse effect” has occurred that would allow the buyers to walk away from the deal.

“We regret bringing this suit,“ Lord said in a statement. “Sallie Mae has honored its obligations under the merger agreement. We ask only that the buyer group do the same. We are prepared to close under the contract the parties signed in April.”

Lord had some harsh words for the investor group and in particular for J. Christopher Flowers, who runs the private equity firm bearing his name.

The two banks “remain the logical owners for the company, but they’re not the only possible owners,” Lord said. “So if [the] deal doesn’t go, so be it. We’ll start over.”