Sallie slashes 2008 profit forecast

Section: Education

Marcy Gordon, AP Business Writer

Student lender Sallie Mae on Wednesday slashed its profit forecast for the fourth quarter and all of 2008, as it hoards cash to offset bad loans and faces reduced federal subsidies.

The company also said it failed to renegotiate a buyout with an investor group that balked several months ago at its original $25 billion cash offer for Sallie, the nation's largest student lender. The investor group, led by private-equity firm J.C. Flowers & Co., "does not wish to pursue these opportunities," Sallie, formally known as SLM Corp., said in a press release.

After the announcement, Sallie's shares sank $3.94, or more than 12 percent, to $28 a share. That is more than 50 percent below the original $60-per-share offer from the investor group, which also includes Bank of America Corp. and JPMorgan Chase & Co.

The investor group had no immediate comment.

Sallie and the group have been feuding for months over terms of what would be one of the world's largest private-equity takeover deals, and the dispute has landed in court. The group maintains that a "material adverse effect" has occurred, and therefore it should not have to pay a $900 million breakup fee.

The investors argue that student-loan legislation that has reduced federal subsidies since Oct. 1, and weaker economic conditions, have had a significant negative impact on Sallie, justifying the cancellation of the deal agreed upon in April.

Reston, Va.-based Sallie said Wednesday that it "will pursue all available recourse, including its lawsuit against the investor group."

The company said it "offered to consider an alternative transaction with the Flowers group, and to give them the opportunity to update their due diligence and submit a new proposal to acquire the company with no pre-conditions."

In the third quarter, Sallie wrote off $142.6 million for borrowers missing payments on student loans, more than doubling the $67.2 million writedown of a year earlier.