Inside Centre College’s mysterious $250 million ‘gift’

September 12, 2013, 9:28 PM UTC
Centre College

FORTUNE — What was Centre College really supposed to get out of its purported $250 million gift? Recently the small university in Kentucky made headlines because it was meant to receive one of the largest payments ever given to a university. But donor A. Eugene Brockman Charitable Trust withdrew its payout, said to be conditional upon a significant capital market event, earlier this week.

As it turns out, rather than getting cash, Centre was going to be funding something of a leveraged buyout. At the end of the deal, Centre would have owned more than 20% of Reynolds & Reynolds, the car retailer service business run and largely owned by Bob Brockman, Eugene’s son. At the same time, Brockman and other investors would have received a more than $2 billion payout. It’s a complicated, multi-billion dollar deal that surprised even the most sophisticated participants.

Here’s how the deal was meant to work. The A. Eugene Brockman Charitable Trust was to grant Centre College $250 million. This was meant to be invested into Reynolds & Reynolds stock, Bob Brockman’s company, in exchange for a roughly 20% stake. That deal, arranged alongside a $3.4 billion loan offering, would ultimately pay Brockman and other investors nearly $2.5 billion in dividends.

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Centre would be its new partial owner, alongside Brockman’s vehicle, other management, and private equity firm Vista EquityPartners. “It’s a great little company,” says Chris Donnelly vice president at debt market research firm S&P Capital IQ LCD, “It has very solid free cash flow and is a very steady growth business.”

The company confirmed that it cancelled the refinancing last week, and said that it “would have enabled Reynolds to pay off existing debt and deliver a payout to shareholders.” A Reynolds spokesman confirmed that the trust was a shareholder but declined to comment on any other shareholders.

The deal could have paid off immediately. Reynolds had tried, but failed, to sell itself recently. This deal, which put a $5.3 billion value on the company, might offer some valuation floor for future deals. In the event that it might sell itself later, Centre would be a beneficiary.

Universities aren’t strangers to the financial markets. Harvard University’s endowment has long been a buyer of leveraged loans and high-yield bonds, says S&P Capital IQ LCD. Still this deal, larger than the current endowment, would make the college highly vulnerable to one company.

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It is also unclear how the company arrived at its $5.3 billion valuation, or if Centre College, which declined to comment for the story, had an independent advisor.

“We are stunned as much as we are disappointed,” the college’s president John Roush said to the Wall Street Journal. “In retrospect, we might have put a big asterisk on this thing, but no one had any inkling that this would come about,” he told the New York Times.

The deal ultimately fell apart, according to market participants, because of the taxes associated with the $250 million gift. (Donations to endowments are typically tax deductible.)