Sallie Mae is looking to unlock the value of its lending operation and an asset-hungry bank could be the one holding the key.
On Wednesday, the student loan giant's parent, SLM Corp. (SLM), announced it plans to divide into two separate publicly traded companies. One unit would hold the company's $195 billion of private and federally backed student loans under management. The other would be Sallie Mae Bank, a $9.9 billion-asset industrial loan company that has been growing rapidly in recent years.
The company's rationale is that the value of the bank, which is the market leader in private student lending, is overshadowed by the legacy business. Separating the 8-year-old Sallie Mae Bank from the parent could bring out its true value.
It could also bring out the buyers.
"This increases transparency at the bank, so from that standpoint, it would make it easier to be acquired," says Sameer Gokhale, an analyst at Janney Montgomery Scott. "I could see some regional bank being interested. They could grow it at a nice clip, it would likely be accretive to earnings and it is in a good asset class."
Calls to Sallie Mae were not returned and executives from the Newark, Del., company did not discuss the possibility of a bank acquisition during a conference call about the spin-off on Wednesday. Still, a company announcing it plans to try to maximize the value for shareholders by taking it a segment public is often accompanied by potential acquisition chatter. Other recent examples include General Electric's chief executive saying last week that it was considering spinning off the consumer lending business of its GE Capital unit and Royal Bank of Scotland's announcement earlier this year that it plans to float a portion of its ownership in Citizens Financial Group unit in the next few years.
Those potential spinoffs, however, involve massive amounts of assets and observers say that interest from buyers could be thwarted by regulators bent on keeping the biggest banks from getting any bigger. At $9.9 billion in assets, Sallie Mae Bank could be easily digested by a regional bank or could be a transformational partner for a similarly sized company.
It is also conceivable that Sallie Mae Bank could be an acquirer. As an industrial loan company, it is required to hold more capital and has significantly higher funding costs than traditional banks. More than half of the Salt Lake City bank's deposits are brokered and an acquisition of a bank with more core deposits could lower its cost of funding loans.
"It is not a big deal now, but could become an issue when rates go up," says Scott Valentin, an analyst at FBR Capital Markets.
The spinoff is intended to find the right price for the bank. Sallie Mae believes its legacy business of managing federally guaranteed and private education loans is worth $22 a share. The company's stock price has been rising steadily in the last year, going from $13.71 in late May 2012 to roughly $23 just before the company announced the spinoff. (It has climbed another 5% since Wednesday's announcement.)
For now, the bullish stock market could potentially sway the company away from an accepting an acquisition offer. Investment banking sources say that companies exploring spinoffs or initial public offerings are turning down buyouts because they want to be a part of the market's current wave.
For Sallie Mae Bank, the upside could be significant. The bank earned $334 million in 2012 as loans increased by more than 20%, and it is on pace to make even more money this year. Analysts think the stock could initially be valued at $6 to $8 while pointing out that similarly sized banks trade at much higher prices.
"They feel that they are not getting any credit for the growth of the bank," says Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods.
The spinoff has long been expected, so analysts say that while an acquisition is possible, they don't think that is the motivation of Sallie Mae's board and its chairman, Anthony P. Terracciano.
"My guess is that they've attempted or considered every avenue for maximizing the value already," Sakhrani says. But, he adds, "once the spinoff is completed, a bank that is focused on asset generation could see this origination platform that has a competitive edge as an attractive target."
In addition to announcing the split, the company named John "Jack" Remondi as its chief executive officer. He replaces Albert L. Lord, who had previously announced his plans to retire. Joseph DePaulo, executive vice president of banking and finance, will serve as CEO of Sallie Mae Bank, following the spinoff, which is expected to happen in the next year.
"The board and I are confident that [Remondi] will achieve the important task of unlocking more value from today's franchise by creating two, market-leading companies," Terracciano said in a press release.
In a conference call, Remondi said that the company is doing the spinoff now because it is in better shape than it was a few years earlier. Gokhale says current market conditions likely played a hand in the decision, too.
"Given the market, the bank's attempt at price discovery could get a better starting-off point," he says.