Berkshire-Backed USG Rejects $5.9 Billion Takeover by Knauf
(Bloomberg) -- USG Corp. rejected a $5.9 billion acquisition offer by Germany’s Knauf to acquire the wallboard maker rescued by Warren Buffett’s Berkshire Hathaway Inc. when the U.S. housing market imploded a decade ago.
Knauf, USG’s second-largest shareholder, on March 15 offered to pay $42 a share for USG, according to a regulatory filing by Berkshire on Monday.
The bid by closely held Gebr. Knauf KG, at 25 percent above USG’s closing price last week, signals confidence in the Chicago-based company and the U.S. housing market. USG has repaired its finances and returned to growth as home starts rebounded to 1.2 million last year, twice as much as during the depths of the crisis in 2009. U.S. housing starts still lag the five-decade average, suggesting room for additional growth.
The maker of Sheetrock and other building products previously spurned a November offer of $40.10 a share, Knauf said in a filing.
Even Knauf’s sweetened bid is too low, Kathryn Thompson, a founding partner at Thompson Research Group, said in a note to clients. If USG can meet a goal outlined early this month to boost operating-profit margin as much as 4 percentage points by 2020, the shares would be valued at $48 or more, she wrote.
“These offers and discussions between Knauf and Berkshire validate our view that USG has been cheap and still offers upside at the current price,’’ Thompson wrote. She has a price target of $44 and a buy rating on the stock.
USG surged 19 percent to $39.90 at 1:12 p.m. in New York, the biggest intraday gain since September 2009. The shares dropped 13 percent this year through March 23, trailing the 7.3 percent decline of the Russell 1000 Materials & Processing Index. Eagle Materials Inc., a competing maker of wallboard, rose 4.3 percent.
“Knauf’s opportunistically timed proposal is wholly inadequate as it does not reflect USG’s intrinsic value, including the significant opportunities ahead of us,” Steven Leer, USG’s nonexecutive chairman, said in a statement.
On learning of the latest bid, Berkshire, USG’s largest shareholder, proposed selling an option for Knauf to buy the 30.8 percent stake held by Buffett’s company at no less than $42 a share if the German suitor purchased all the shares it didn’t already own. The option would last six months and cost $2 a share, according to Berkshire’s filing.
Knauf, which owns a 10.5 percent stake in USG, is a family-owned company founded by namesake siblings Alfons and Karl in the 1930s. The company specializes in drywall systems as well as industrial flooring and readymix plasters. The company employs about 27,500 people around the world and had 2016 sales of 6.5 billion euros ($8.1 billion), making it one of the largest producers of insulation and drylining systems.
Knauf has financing lined up and would make an all-cash bid, Garik Shmois, an analyst with Longbow Research, said in a note on Monday. The euro’s 15 percent gain over the last year makes the math “more doable” for the German company, he said.
A sweetened bid is likely to come, especially if Berkshire is pushing for an agreement, said Philip Ng, an analyst with Jefferies. Any deal would probably be negotiated on friendly terms given that USG just re-elected its board and Knauf, as an interested shareholder, would have to win 80 percent investor support, Ng wrote in a Monday note.
“With a solid multiple, apparent support from its largest shareholders (40%), and good strategic fit, we would expect the deal to get done at a higher price,” he said.
USG, which was founded in 1902 and has 6,800 employees, makes drywall and ceiling tile for homes and commercial buildings. Sales climbed 6.2 percent last year to $3.2 billion, with U.S. drywall accounting for about 60 percent of sales.
The company plans to improve factory efficiency, partly through automation, and introduce new products to boost earnings, according to a presentation to investors early this month. Adjusted operating profit increased to $438 million last year from $91 million in 2012 while debt was cut by more than half to $1.09 billion. USG expects U.S. housing starts to grow to 1.4 million units in 2020.
Berkshire has held a stake in USG for more than a decade. In 2008 Buffett’s company and Canada’s Fairfax Financial Holdings Ltd. agreed to buy USG debt that paid 10 percent interest, helping the manufacturer stay afloat during the U.S. housing crisis. Berkshire converted those notes into common stock several years later, boosting its stake in USG.
Buffett has long bet on manufacturing firms and counts paint maker Benjamin Moore & Co. and carpet maker Shaw Industries Co. among the companies Berkshire owns.
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