STAMFORD, Conn. (CN) – Shareholders say The Student Loan Corporation is selling itself for less than half of its book value to Discover Financial Services and Citigroup. Citigroup already owns 80 percent of the shares of Student Loan Corp., and the buyout will give it and Discover the entire student loan business and $4 billion in outstanding private loans, according to the class action in Superior Court.
Discover Financial Services announced the agreement to buy The Student Loan Corp. for $600 million, or $30 a share – less than half of the company’s book value of $65 per share, and 38 percent less than its liquidation value of $48 per share, according to the complaint. Citigroup owned more than 16 million shares of SLC before the buyout, according to the complaint.
Named plaintiff John A. Zengel says the deal will enrich the defendants at the expense of SLC stockholders.
Under terms of the deal, which was announced Sept. 17, Student Loan will sell $28 billion of its loans and assets to Sallie Mae, and $8.7 billion of its loans and assets to Citigroup.
After the buyout was announced, Citigroup declared that it had “entered into definitive agreements that will result in the divestiture of its private student loan business and approximately $32 billion of its $46 billion in assets to Discover,” according to the complaint.
Although this will result in a $500 million after-tax loss, Fitch Ratings stated that “this loss is considered minimal in the context of [Citigroup’s] core earnings and capital,” according to the complaint.
Although Student Loan Corp. “had experienced a downturn due to the economy, it has recently been steadily improving and was poised for significant growth,” the complaint states.
The class claims that the “buyout transaction is, in effect, a change-of-control of SLC, with Citigroup, as the controlling shareholder, engaging in both sides of the transaction; particularly, the acquisition of SLC’s key assets for itself.”
The complaint adds: “had the company simply wound down its business and sold its assets separately for cash, shareholders would have obtained an almost 50 percent greater value for their holdings than through the buyout transaction.”
The class sued Student Loan Corp. and its officers and directors for breach of fiduciary duty, and Citigroup and Discover Financial Services for aiding and abetting breaches of fiduciary duties. They seek an injunction rescinding the buyout and damages and interest if it is consummated.
The class is represented by Jeffrey Nobel and Wayne Boulton with Izard Noble of West Hartford.
The complaint reports mixed, but far from dismal financial results for SLC: “On July 16, 2010, SLC reported a decrease in profit for the second quarter 2010. For the quarter, net income declined to $20.82 million from $25.26 million last year. On a per-share basis, earnings fell to $1.04 from $1.26 for the comparable quarter a year ago. However, SLC’s net interest income grew 33 percent to $94.46 million from $70.88 million last year. After provision for loan losses, net interest income more than doubled to $53.06 million from $26.06 million a year ago. Provisions for loan losses were lower at $41.40 million compared to $44.83 million last year.”