Sept. 26 (Bloomberg) -- SLM Corp. said a group led by J.C. Flowers & Co. won't complete the $25.3 billion purchase of the largest U.S. student loan company. The group said it's open to negotiation.

The group doesn't expect to complete the $60-a-share acquisition, Reston, Virginia-based SLM, known as Sallie Mae, said today in a statement. Under an agreement announced in April, SLM was to be sold for $60 a share to an entity 50.2 percent- owned by Flowers, with JPMorgan Chase & Co. and Bank of America Corp. each holding 24.9 percent.

The buyout was thwarted partly by U.S. legislation to cut subsidies for the student-loan industry. The action in Congress caused SLM shares to fall about 18 percent since early July. In addition, investment banks have been faced with possibly $25 billion in write-offs of loans and bonds to fund takeovers, making them cautious about new buyouts.

``They'll get back to the table,'' said James Hill, co-chair of the private-equity group at Benesch, Friedlander, Coplan & Aronoff LLP, a Cleveland-based law firm that doesn't own SLM shares. ``This is the art of negotiation. They need to see if they can negotiate the price and make it worth its return on equity.''

`New Environment'

``The conditions to closing under the merger agreement, if the closing were to occur today, would not be satisfied as a result of changes in the legislative and economic environment,'' the Flowers group said in an e-mailed statement today. ``We have told representatives of the Sallie Mae Board that we are open to discussing a revision of the transaction that reflects this new environment.''

SLM fell $1.24, or 2.7 percent, to close at $45.01 in New York Stock Exchange composite trading, one-fourth below the $60 price of the buyout agreement.

Credit-default swaps tied to Sallie Mae's debt fell to the lowest in three months as investors speculated the company will not be loaded up with debt in a leveraged buyout. Five-year contracts fell 25 basis points to 205 basis points from 230 before the company's statement, according to broker Phoenix Partners Group in New York.

More than 50 companies have scrapped or reworked bond offerings since June as investors retreated from all but the safest of government debt as losses on securities linked to subprime mortgages spread, Bloomberg data show. Banks have committed to provide about $370 billion in debt financing for pending leveraged buyouts, including that of Sallie Mae, according to Bank of America Corp.

Pursuing `Remedies'

SLM now will pursue ``all remedies'' under law, according to the statement today.

Either the Flowers-led group or Sallie Mae would have to pay a $900 million fee for walking away from the deal without showing that a ``material adverse effect'' has occurred since the initial agreement, according to a regulatory filing.

The merger agreement between Flowers and Sallie Mae defined the term as events that harm the financial condition or operation of the company, such as changes in law that are ``in aggregate more adverse'' than legislative and budget proposals earlier in the year by the Senate, House and the White House.

In their statement today, Sallie Mae said it ``firmly believes that the buyer group has no contractual basis to repudiate its obligations.''

A measure approved by Congress and scheduled to be signed tomorrow by President George W. Bush would reduce government subsidies to loan makers by $20.9 billion over five years.

Flowers said in an e-mail last week that there was a ``possibility that the conditions to closing may not be met.''

To contact the reporter on this story: William McQuillen in Washington at bmcquillen@bloomberg.net

Last Updated: September 26, 2007 17:45 EDT