SLM Corp. (NYSE: SLM) shares are trading higher today after the company announced that banking veteran Anthony Terracciano will serve as chairman, and former Sallie Mae executive John Remondi as chief financial officer. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SLM.
After hitting a one-year high of $58.00 in August, the stock hit a one-year low of $16.35 on Friday. SLM opened this morning at $18.12. So far today the stock has hit a low of $17.55 and a high of $19.20. As of 11:00, SLM is trading at $18.95, up $2.28 (13.7%). The chart for SLM looks bearish and steady. while S&P gives the stock it a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 13.6% return in just six weeks as long as SLM is above $15 at February expiration. Sallie Mae would have to fall by more than 20% before we would start to lose money.
SLM hasn't been below $16 at all in the past year and has shown support around $16.50 recently. This trade could be risky if the stock continues its recent precipitous fall, but even if that happens, this position might be protected by bargain hunters who think this stock has fallen too far.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in SLM.
Yesterday, Sallie Mae -- known more formally as SLM Corp. (NYSE: SLM) -- lost $2.36 a share, closing at $20.53. The cause of this dramatic loss, over 10% on the day, was the failure of the firm's new CEO, Albert Lord, to reassure analysts that he is in control of Sallie Mae and has a plan for turning things around. In fact, during an analyst conference call on Wednesday, Lord was downright bizarre, refusing to provide any income projections and, worse, making bad jokes and cursing audibly.
Yesterday wasn't the first bad day for Sallie Mae, not by a long shot. In the last few weeks, news about Sallie Mae has been universally bad. In October, the private equity firm J. C. Flowers lowered the value of its buyout offer by 20%. The ensuing struggle over the buyout, as well as changes in federal law that may make students loans less profitable, helped send the stock down from the $50 range to the $30s. And it's been all downhill ever since.
In Wednesday's conference call, Lord repeatedly refused to answer analyst questions about 2008, despite the fact that SLM lowered guidance last week. He invited analysts to a meeting in New York next month, saying that they should "get there early because I can assure you, you will be going through a metal detector." Then, to make matters worse, at the end of the call he was heard to say, "There's no questions, let's get the [expletive] out of here."
With leadership like that, it looks like Sallie Mae has a long way to go before investors feel secure enough to jump back in.
The buyout of SLM Corp. (NYSE: SLM) by the private equity firm J.C. Flowers is now officially over. The Wall Street Journal has declared Christopher Flowers and his backers at J.P. Morgan Chase and Bank of America the victors in the struggle over the deal, and no doubt the potential buyers are happy to have escaped with their funds intact.
As Peter Cohan noted, Flowers wanted out of its original offer as the growing crisis in the credit markets made Sallie Mae a less attractive target. In October, Flowers cut its original offer of $60 per share by 10%, to $50 per share. It replaced that $10 per share with warrants to buy shares at a later date. But Sallie Mae rejected the deal.
The outlook looks pretty grim for SLM. It has lost subsidies via the College Cost Reduction Act, and today it cut its earnings forecast by 20%. Its stock is hovering at the $28 level this afternoon, down over 40% for the year. Sounds like a stock in trouble -- which means that a buyout offer is probably just around the corner. Except this time, SLM will be lucky to get half of what J.C. Flowers originally offered. Amazing what a few months and a credit crisis can do.
Wall Street has its own brand of breaking up. There may not be 50 ways but there are at least two -- the easy way and the hard way. According to the New York Times, KKR and The Goldman Sachs Group (NYSE: GS) are splitting with Harman International (NYSE: HAR) the easy way, while J.C . Flowers is taking the hard route to killing its deal with SLM Corp (NYSE: SLM).
The easy way, in the Harman case, is for the buyers to buy $400 million worth of Harman bonds instead of paying $8 billion to own the company. Under the new agreement, the buyout deal struck in April will be dissolved, with no litigation or payment of the $225 million termination fee. Instead, KKR and Goldman will buy bonds that can be exchanged for Harman shares at $104, below the $120-a-share price of the original offer -- but much higher than its current $85.87.
Harman gets some cash and saves face while KKR and Goldman get out of investing in a cratering company -- HAR's earnings of 50 cents a share for the most recent quarter are expected to be less than half of the $1.02 analysts had forecast.
Sallie Mae (NYSE: SLM) is sick of having sand kicked in its face by its potential buyer, JC Flowers, and Flowers' banks.The private equity firm that agreed to pay $25 billion for the student loan company has come back with a lower price, claiming that Sallie Mae's financial future has gotten much worse. Now, Sallie Mae is suing to get its break-up fee of $900 million
According toReuters, "The suit seeks a declaration that Sallie Mae may terminate the merger agreement and collect the damages, that the buyer group has repudiated the merger agreement, and that no material adverse effect has occurred." SLM is arguing that there has been no meaningful change in its business since Flowers made its offer. The buyout firm and its banks make the case that legislation slashing subsidies to student lenders and a serious credit squeeze have cut Sallie Mae's value. Flower's banks are JP Morgan (NYSE: JPM) and Bank of America (NYSE: BAC).
The move by SLM may usher in a new wave of litigation as private equity buyers walk away from buyouts that they no longer think make financial sense. If Sallie Mae can win in court and collect its $900 million, a number of legal actions could follow brought by public companies that watched buyouts fall apart.
While it may seem odd, it is possible that the legal system will slow buyouts as much as the current credit crunch.
The gunfight at the OK Corral: Private equity firm JC Flowers tried to back out of its deal to buy student loan company Sallie Mae (NYSE: SLM). Then the firm came back with an offer $10 below the original $60/share price.
The whole matter put the Sallie Mae board in a bind. Take a lower price, or take nothing and watch the shares fall. The stock trades just above $49 now.
But SLM got a big vote of support in its efforts to push Flowers to honor the original deal. Three of its big institutional shareholders said that the private equity firm has to do the right thing and write the $60-a-share check. The firms include Barrow, Hanley Mewhinney & Strauss, New York hedge fund QVT Financial and Capital Guardian Trust Company.
"We strongly support your decision to hold firm to your contract and a $60-per-share sale price and hope you will continue to reject any overtures to renegotiate the contract price or the structure of the consideration," QVT Managing Director Nick Brumm said in a letter obtained byThe New York Post.
Now, it would appear that Flowers is on the hot seat. These large investors are saying that it is liable for the $25 billion deal. No one should be surprised if they decide to take the buyout operation to court.
With $25 billion on the table, the action has turned very unfriendly.
The New York Times [registration required] reports that J.C. Flowers, the private equity firm that announced it was pulling out of its deal to buy SLM Corp. (NYSE: SLM), has changed its mind. Flowers is now offering $50 a share in cash, 10% below its original $60 a share offer for the student lender.
But J.C. Flowers has offered a kicker: warrants to buy SLM shares, which it claims could eventually be worth as much as $10 a share if SLM meets or exceeds its earnings projections. Warrants, which give their owners the right to buy shares at a specific price, are sometimes used in bankruptcy cases as a way to repay creditors. The idea is that if the company fares better than expected, warrant holders can share in the profits by exercising the options. But a few hours ago SLM announced it rejected the offer.
According to its statement, J.C. Flowers wanted out because of a law signed by the president which limited government reimbursement of student loans. But SLM countered with a statement reaffirming its rights under the merger contract. So what does the cash and warrants deal mean? It could be seen as a clever way to tie SLM's sale price to its business prospects. Or it may be an attempt to buy SLM on the cheap while claiming to stand by its previous bid
There have been rumors and press reports for a couple of weeks that the J.C. Flowers deal to buy student loan company SLM Corp. (NYSE: SLM), better known as Sallie Mae, might fall apart. Finding debt to close the purchase of the company was getting tough.
Yesterday, the rumors become news. Flowers backed out of its commitment. The Wall Street Journal writes that, "Mr. Flowers informed a group of UBS bankers that he wasn't prepared to pay the $60-a-share price he had agreed to in April." UBS is Sallie Mae's banker.
Flowers may simply be fishing for a price lower than his first offer. With its stock price at risk, the SLM board might be tempted to take a reduced price.
The buyout firm is arguing that legislation which could hurt the student loan market amounts to a "material adverse effect" to the deal, and that this gives Flowers the legal right to walk away.
The SLM board does not have any good choices. It could sue Flowers to complete the deal, and it probably should. But, as the legal fight drags on, shares in the student loan company are likely to fall. That leaves the board between Scylla and Charybdis.
Despite a 50 basis point drop in the price of money, the Bernanke bailout is not helping the LBO market much. The New York Times [registration required] reports that a $25 billion deal to take student loan bundler Sallie Mae parent SLM Corp. (NYSE: SLM) private is on the skids.
Meanwhile, Bloomberg News reports that the negative side effects of lower interest rates is helping weaken the dollar. This morning it hit a record low of $1.40 relative to the euro. This may actually be good news for companies that derive a significant portion of their revenues from overseas -- particularly in Europe. But as someone who is thinking about taking a trip to Europe next year, I am concerned about how outrageous the prices there will seem to me.
J.C. Flowers, the firm spearheading the SLM buyout, may be willing to walk away from the deal and pay the $900 million breakup fee. Sallie Mae stock now trades 17% below its 52-week high of $58, probably because the market anticipates the deal will either fall apart or be concluded at a much lower price.
With concerns that the Sallie Mae (NYSE: SLM) transaction may not close hitting the headlines as Congress returns to session ahead of next year's presidential election, could an opportunistic candidate turn national sentiment against a small, yet powerful, private equity group?
Sallie Mae was created to provide low-cost loans to U.S. students so they could afford a college education, mostly targeting those groups who could least afford it. While this mandate has lost its focus as Sallie Mae loans are no longer cheap, it does leave the opportunity for a smart politician to seize the moment: Why should the profits of government-backed debt for students go to JC Flowers, so they make billions in profits?
The same could be said about the recently completed buyout of HCA, the large hospital chain. by KKR,Bain Capital, and Merrill Lynch Global Private Equity. While it is a Class A operation, it generates a substantial portion of its revenue from Medicare and Medicaid. Once again, why should the U.S. taxpayer, who finances both Medicare and Medicaid, be paying money to HCA so they can pay down the $30-plus billion in debt so a few shareholders can walk away with billions?
It is interesting how one deal, Sallie Mae, could potentially raise so many red flags. As with most market excesses, one deal always become the poster-child deal symbolizing an era's end. Look for it to be Sallie Mae this time around. HD Supply renegotiating the terms for its deal could prove to be pure chump change.
Just last week, I addressed some of the pending mergers that are being deemed at risk as far as "WILL THEY CLOSE?" and there are still some pretty large spreads between today's stock prices and the implied merger prices. That merger risk-arb is an area that has made fortunes for many funds, and it has led to many a demise. Here are some of the pending deals covered today so you can see where there is risk and where there is opportunity.
Tribune (NYSE:TRB) is perhaps one of the most frequently referred to deals. This is one that we have speculated will have a price cut. After all, would you loan Sam Zell and this company this much money when the media fundamentals are as bad as they are (and they only get worse)? Shareholders have approved the deal, but that was a given. Tribune's $34.00 buyout price has an implied return of over 20% to today's prices of $28.15, but I think a safe bet is for a lower-than-voted-on price.
First Data Corp. (NYSE:FDC) is the one of the biggest mergers pending that is still at risk. First Data is set to receive $34.00, and shares are currently at $32.51. The good news is that this KKR-led deal is MUCH better in risk-arb terms than it was two weeks ago when shares dipped to under $32.00.
Sallie Mae, or SLM Corp. (NYSE:SLM), is really perceived as being at risk. It isn't just the financing being at risk. The regulatory agencies may want this blocked as it is a quasi-agency status. If you don't think a $60.00 buyout price is a risk when the shares are at $49.05 today, then what can be said? J.C. Flowers & Co., Bank of America Corp.(NYSE:BAC) and JPMorgan Chase & Co.(NYSE:JPM), have said that legislation could kill the deal.
TXU Corp. (NYSE:TXU) is the real biggie, and still up in the air. You have to wonder why Warren Buffett wouldn't have stepped in for his WHALE OF A DEAL, particularly since he has telegraphed that he'd like to own utilities. ISS has recommended that shareholders vote in favor of the buyout.
Jon Ogg is a partner in 24/7 Wall St., LLC; he produces the Special Situation Investing Newsletter and does not own securities in the companies he covers.
The shareholders of student-loan provider SLM Corporation (NYSE: SLM), better known as Sallie Mae, have agreed to a $25.3 billion buyout by a group led by J.C. Flowers & Co. -- but that does not mean the deal is done. Now the buyer must decide if it still wants Sallie Mae and, if so, is it still willing to pay a price that is now 28% higher than SLM's closing price yesterday.
There's some uncertainty about Sallie Mae's business model due to the government's possibly cutting subsidies more than SLM had anticipated. That would negatively affect the company's profit and possibly cause the buyers to withdraw or seek to renegotiate terms. This has not gone unnoticed by SLM shareholders. "Sallie Mae seems to be trying to move it to fruition before the legislation goes through," says Richard Hofmann, an analyst with CreditSights.
SLM Corp. said it doesn't expect the proposed legislation to kill the transaction, but a spokesman for the buyers said that there was a "possibility that the conditions to closing may not be met." Whether the buyers are truly skeptical of the transaction closing, or are using this as leverage for a better price, is unclear.
Says Hofmann, "Our question has been whether Flowers wants to abandon the deal, or do they want better terms? To say they really think it is a bad deal and want to walk away is far-fetched."
Another possibility is that the buyers, who include Flowers, JP Morgan Chase & Co. (NYSE: JPM) and Bank of America Corp. (NYSE: BAC), have reconsidered this large a purchase in light of the current market conditions. If so, they won't be alone.
When a new investor first studies merger arbitrage, the concept seems incredible -- the ability to make almost guaranteed profits, especially because it seems that deals are pulled or rejected ever so rarely. But as this new investor begins following the market more, he quickly learns that deals are in fact pulled. Recently, we saw the firms interested in purchasing SLM Corp. (Sallie Mae) (NYSE: SLM) pull their deal. As you can see from the chart on the right, this killed the arbs involved in the deal.
I don't think this is going to be the last time that a potential private equity deal is pulled, much to the disappointment of arbs. As I've been covering on BloggingBuyouts, I think the credit situation in the United States is quickly turning sour. Many professionals in the fixed income space who I talk to constantly talk about not being paid enough interest to justify the risks that they are taking. As a result, I believe private equity firms are going to have much more trouble in borrowing the money they need to continue their leveraged buyouts. I think arbs are going to face more pain in the future.
In the $25 billion buyout of SLM Corp (NYSE: SLM), also known as Sallie Mae, the buyers -- J.C. Flowers, Friedman Fleischer & Lowe, Bank of America (NYSE: BAC) and JP Morgan Chase & Co. (NYSE: JPM) – used the legal services of Wachtell Lipton Rosen & Katz as well as Sullivan & Cromwell LLP.
Well, it looks like it was money well spent. According to a report in The Wall Street Journal, it looks like the SLM deal may come undone because of proposed legislation in Congress that would curtail the school loan industry. The private equity firms believe it would be a violation of the merger agreement. However, SLM disagrees. So, this could lead to even more legal fees and litigation.
SLM's stock is down about 8.65% to $52.80. The current buyout offer is $60 per share. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Defining periods of irrational exuberance can be difficult. However, one method to do so might simply be to look at the headlines. Here are this morning's:
Crescent Real Estate Equities to be purchased by Morgan Stanley (NYSE: MS) Real Estate
The headlines are not too different from the 1980s LBO boom when virtually every headline was associated with a hostile buyout of some sort. Are we approaching the end of the buyout binge? Most likely not. These periods can last for years.
This buyout boom has been fueled by a number of factors. The most important factor has been undervalued stocks, which, in many cases, still remains. In the post tech-telecom bubble of the 1990s, investors went into a cocoon while U.S. company management continued to grow earnings and increase returns on investment.
What will end this buyout boom? My bet is a massive bull market which pushes valuations off the radar screen of private equity.
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SLM Corp. (NYSE: SLM) shares are trading higher today after the company announced that banking veteran Anthony Terracciano will serve as chairman, and former Sallie Mae executive John Remondi as chief financial officer. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SLM.
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