Sallie Mae Goes Private
Monday, April 16, 2007SUSIE GHARIB: Sallie Mae, the nation's largest student lender, is being bought and taken private. The buyers, a partnership of private equity and two of the biggest banks in the country. JC Flowers and Friedman Fleischer and Lowe, two private investment firms, are taking a 50.2 percent stake, while JPMorgan Chase and Bank of America will each own 24.9 percent of the firm, officially known as SLM Corporation. The total price tag: $25 billion or $60 a share. That's nearly 50 percent premium over what Sallie Mae stock was trading at last week. Despite the hefty price tag, analyst Sameer Gokhale of Keefe, Bruyette and Woods, thinks it's a good deal.
SAMEER GOKHALE, ANALYST, KEEFE, BRUYETTE & WOODS: There's an increased need for student loans to help students get access to higher education. So it's a growth industry with good economics and there's a high degree of visibility into it for the next decade, which is why I think this is a very attractive opportunity for the banks and why it's an attractive industry.
GHARIB: In 2006, Sallie Mae loaned over $23 billion to students, but recently was accused of deceptive sales practices by New York state attorney general. The company settled those charges last week.
Well, now that the wave of private equity buyouts has rolled into the financial services industry, are similar deals on the horizon? As Erika Miller reports, some analysts think we could be entering a new era for the sector.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Financial services companies have traditionally been considered off limits by private equity firms. Bear Stearns analyst David Hochstim explains that's because many companies in the sector are highly leveraged.
DAVID HOCHSTIM, SPECIALTY FINANCE ANALYST, BEAR STEARNS: Typically, most financial companies already operate with a high amount of debt. So it would be difficult to load on a lot more debt, as is typically done in a leveraged buyout.
MILLER: But investment bankers were able to layer more debt on Sallie Mae to make that buyout happen. As a result, investors are betting there will be a slew of similar deals. Shares of student loan lender Nelnet surged over 14 percent today on speculation it could be next. Some analysts are wondering if private equity companies might even target major U.S. banks and brokerage firms. Robert Albertson, chief strategist at Sandler O'Neill, says such a large deal is unlikely at this point.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: It's very difficult from a regulatory point of view to please the regulators and take a bank private. It takes a lot of capital and not that it can't be done, but most of the bank consolidation occurs bank to bank. And that's probably going to continue unless it's a very small organization.
MILLER: He also believes valuations for major banks and brokerage firms are not low enough to attract serious interest from buyout firms. Some experts say potential consolidation is just one more reason to invest in financial services stocks.
HOCHSTIM: I think that the outlook for a number of companies is still quite good. The economy is doing well. Unemployment is low. Consumers are servicing their debt. The worry I would have is if the economic environment changes. I don't really see signs of that right now.
MILLER: But others disagree.
ALBERTSON: The party we've had in the U.S. financials I think is largely over. For this party to continue, you'd have to have continued ample liquidity and you'd have to have continued sound credit. And I think that's stretching the imagination to think that can continue.
MILLER: There's one thing nearly everyone agrees on, the likelihood of more consolidation in the financial services arena. They say size and scale are crucial competitive advantages. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
