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Sallie Sniffs at Flowers Bid

A foundering LBO looks like it's on the way to the courthouse.

Sallie Mae's

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teetering buyout offer looks to be headed for court.

Executives at the Reston, Va., student lender aren't happy with the revised offer made Tuesday by the company's private-equity buyers, one source familiar with Sallie tells


Buyers led by private-equity firm J.C. Flowers offered to buy Sallie for a lower price. The Flowers group, which also includes

Bank of America

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, said the new offer "appropriately and fairly reflects the new economic and legislative environment that faces the company."

The sides agreed this past spring to a $60-a-share deal, but Flowers said last month that changes in the economic and legislative landscapes meant it wouldn't complete the $25 billion purchase. So Flowers said Tuesday it would offer $50 a share plus stock warrants worth as much as $10 a share, based on certain performance targets.

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"We think this is a very thoughtful offer," says one person familiar with the buying party.

Alas, Sallie Mae doesn't seem to agree. Sallie's executives have been unwavering in their belief that terms of the deal have not been materially altered despite new legislation that cuts government subsidies to such student loan organizations.

Flowers reached out to Sallie Mae's Chairman Albert Lord with the revision early this morning, but Lord has so far refused to listen to revised terms, an executive following the deal tells

. That move forced the buyout shop to take the revised offer public.

The source of the dispute between Sallie and its would-be buyers centers in part on the effect of recently passed legislation -- and in part on a sharp change in the debt markets since this summer's credit crunch.

Sallie has speculated that the legislation would only reduce net income by about 2% annually over the next five years, while the J.C. Flowers-led group believes the damage could be more like 14% to 20%.

Sallie Mae's assessment is that "there will essentially be no impact" from the new legislation, says a person close to the buyers. "This offer essentially represents a referendum on how much credibility that you place in the projections," that person says.

Officials at Sallie and the private-equity group declined to comment.


reported last week, Sallie seems willing to play hardball with the private-equity consortium because it does not believe that the deal has experienced a so-called material adverse change.

Much of the dustup over the buyout stems from the changing finance environment as much as new laws. Bagging some $25 billion in debt for mega-buyouts such as Sallie Mae is harder now, given the tightness in the bank lending market.

A dissolution of the deal comes with a $900 million breakup fee, which the private-equity buyers would be reluctant to pay.

In the end, it might come down to the courts to settle that.