Buffett Seen Mulling Strong-Arm Moves in Knauf's USG Pursuit
(Bloomberg) -- Warren Buffett has typically shunned hostile tactics as he’s built Berkshire Hathaway Inc. into a sprawling conglomerate. His forbearance is about to be put to the test.
The question for Berkshire is whether to back a shareholder revolt at USG Corp., which has rejected an offer by Germany’s Knauf of $42 a share. The rejected suitor, which owns about 10 percent of USG, is calling for shareholders to vote against board nominees as a way to pressure the biggest U.S. maker of gypsum wallboard into accepting the $5.9 billion deal.
That puts the focus on Buffett, who has described USG as “not one of my great ideas.” Berkshire has already said it would take the Knauf offer for its 31 percent stake in the Chicago-based company, as long as the German company bought the rest of USG at no less than $42 a share. Still unknown is whether Buffett will be willing to go against management in the showdown at USG’s annual meeting May 9.
“The shareholders meeting is going to be the catalyst to get this resolved once and for all,” said Garik Shmois, an analyst with Longbow Research.
Berkshire’s willingness to accept the price “suggests there will be enough support” for Knauf’s position, Shmois said.
USG rose less than 1 percent to $40.02 at 10:11 a.m. in New York. The shares closed at $33.51 on March 23, the last trading day before Berkshire made the acquisition talks public.
Earlier this week, USG said Knauf’s bid “is wholly inadequate, opportunistic and does not reflect the intrinsic value of the company.” It reaffirmed its rejection of the offer Thursday in a letter to shareholders, urging them to vote for the board slate.
Chief Executive Officer Jennifer Scanlon and Chairman Steven Leer took the helm in November 2016 as the manufacturer turned the corner on past financial struggles. At its first investor day meeting in March, USG laid out a plan for factory automation and new products. The company said the moves would boost profit margins and push free cash flow to at least $450 million by 2020 -- more than double last year’s level.
Knauf now wants to swoop in and reap the benefit from the transformation, USG said in its letter to shareholders.
“The reality is their proposal would prohibit all USG stockholders from sharing in the benefits of USG’s strategic plan, which positions the company to drive meaningful financial and operational improvements,” USG said.
For Berkshire, a deal would untangle the company from what Buffett has called a “disappointing” investment. USG went bankrupt in 2001 under the weight of asbestos settlement payments, before emerging in 2006. Two years after that, it required a Buffett bailout after the U.S. housing market imploded.
Buffett showed his pessimism last year at Berkshire’s annual meeting, when he lamented the slow recovery of the housing market, volatile wallboard prices and lingering asbestos issues. He also said overcapacity sometimes afflicts the wallboard industry.
Then last month, Berkshire made negotiations between Knauf and USG public. In a filing, Berkshire outlined its willingness to sell an option to Knauf for its 31 percent stake in USG at a price of at least $42 a share. That option offer signaled Berkshire’s openness to Knauf’s proposal.
“It complicates it for USG because Buffett’s put a price on the table that he’s willing to sell at and USG’s apparently not happy with that price,” said Greggory Warren, an analyst at Morningstar Inc.
Buffett didn’t immediately return a message seeking comment left with an assistant. A representative for Knauf declined to comment beyond its April 10 letter to USG shareholders.
For Knauf, taking a more hostile route would be a steep climb, said Philip Ng, an analyst at Jefferies. The company would need support from 80 percent of USG investors because it’s an interested shareholder, he said.
An attempt at a board takeover would drag on because terms are staggered and Knauf missed the window this year to propose its own candidates. Even if a majority votes against the nominees at the May 9 meeting, USG can appoint them to the board and they could seek election again next year.
Still, a vote against USG’s board slate would send a clear signal that shareholders want a deal with Knauf. If Berkshire supports Knauf’s campaign, it wouldn’t be hard to convince enough shareholders to join them, Ng said.
“Buffett has been forthcoming that he hasn’t been thrilled with the investment, so you have a willing seller in Berkshire,” he said. “Combined they have 40 percent of the shareholder base, so that’s pretty powerful.”
There’s time before the May meeting for an agreement to be reached, Longbow’s Shmois said. Knauf has some room to sweeten its offer and USG may succumb to pressure to accept it, especially if it’s clear that a majority of shareholders will vote against the board nominees, he said.
“I don’t think the USG board holds on for too much longer if it doesn’t go in their favor,” he said.
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