Is Sallie Mae's $2.5 Billion Raise Enough? (SLM)

SLM Corp. (NYSE: SLM), or Sallie Mae, was perhaps the worst merger-arb implosion in recent times. Late yesterday the announced that it is commencing a common stock and convertible preferred stock offering that totals $2.5 Billion.  The offering breakdown is $1.5 Billion  in common stock and $1 Billion of mandatory convertible preferred stock. 

Sallie Mae will use roughly $2 billion of the proceeds to physically settle its outstanding equity forward purchase contract, pursuant to which it will effect the repurchase of 44,039,890 shares of common stock deliverable to Sallie Mae under the contract. The dilutive impact of the two offerings will be partially offset by the physical settlement of the outstanding equity forward purchase contract.

Any proceeds remaining after such settlement will be used for general corporate purposes. UBS and Citigroup will act as joint book-running managers for the offerings. 

Sallie Mae manages some $160 Billion in education loans and serves nearly 10 million student and parent customers. It also manages $19 Billion in 529 college-savings plans, and 8 million members have joined Upromise to help save for college. 

Unfortunately because of a blown merger, a severe credit crisis, and a whole host of pending class action suits, we can’t rely on the old balance sheets as a complete snapshot.  Sallie Mae shares have traded as high as $58.00 this year and as low as $18.68, and shares closed at $22.13 yesterday.  Shares appear to be trading under $21.00 in third market activity.

As much of this offering is in a sense meant to offset an existing $2 Billion in commitments that went against it, there might need to be some faith here that the $500 million (actually less after investment banking fees) for "general corporate purposes" will do the job.  So far, that appears to be in question.

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Jon C. Ogg
December 27, 2007