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% 16.7% 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
The key to the deal is whether the warrants will really be worth $10. Analysts interviewed by the New York Times expect them to be worth at most half that -- between $4 to $5 a share -- because they would not be exercisable for five years. But holders wanting to cash out before then would probably be able to sell them at their current market value.
So will the discounted deal for SLM go through? With SLM announing its rejection of the offer, the stock is stuck at $50.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in SLM.
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