Buffett Joins Shareholder Revolt at USG as Berkshire Seeks Exit

(Bloomberg) -- Berkshire Hathaway Inc. threw its weight behind a Knauf-led shareholder revolt against USG Corp.’s board, signaling Warren Buffett’s desire to exit as the largest investor in the wallboard maker.

Berkshire said it will heed a call by Germany’s Knauf for shareholders to vote against USG’s four board nominees, applying pressure on the company to reconsider a $5.9 billion acquisition bid. USG has spurned the offer of $42 a share, while Berkshire has said it would accept that amount if a sale is approved.

“This is a pretty decisive response,” Garik Shmois, an analyst with Longbow Research. “It sends a pretty clear signal that Berkshire is in favor of a sale.”

Other shareholders are likely to join Knauf and Berkshire, which owns 31 percent of USG, in the push for management to reach a deal, said Tim Wojs, an analyst with Robert W. Baird & Co. Knauf is the second-largest shareholder, with about a 10 percent stake.

USG rose 2.8 percent to $40.94 at 1:15 p.m., after reaching $41.45, the highest intraday since August 2007. The shares closed at $33.51 on March 23, the last trading day before Berkshire made the acquisition talks public.

Knauf is the only clear potential buyer of USG, which means that if management fails to reach a deal, it risks having shares retreat to where they traded before the negotiations became known, Shmois said.

Representatives for USG and Knauf didn’t respond to requests for comment.

Exit Opportunity

A deal would untangle Berkshire from what Buffett has called a “disappointing” investment. USG filed for bankruptcy protection in 2001 under the weight of asbestos litigation settlements, and emerged in 2006. Two years after that, it needed 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.

“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.

Although Berkshire’s support of Knauf piles pressure on USG, the hurdle is high for the German company to make a hostile move. It’s too late to propose an alternative board slate and the nominees can become directors for a year even if they fail to win a majority of votes. For a hostile takeover, Knauf would need support from 80 percent of USG shareholders.

‘Wholly Inadequate’

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, which was issued before Buffett’s statement.

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 an 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.

“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.

There’s time before the May 9 shareholder meeting for an agreement to be reached, said Longbow’s Shmois.

“Now that Berkshire is on board with Knauf’s proposal, a small sweetener is what’s needed to get USG to sell," Shmois said. If it becomes clear that a majority of shareholders will vote against the board nominees, “I don’t think the USG board holds on for too much longer,” he said.

To contact the reporters on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net, Thomas Black in Dallas at tblack@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Susan Warren, Tony Robinson

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