Berkshire-USG: Just What Warren Buffett Needs, More Cash

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(Bloomberg Gadfly) -- For Warren Buffett, when it rains, it pours -- money, that is.

The billionaire investor is grappling with an excessive cash buildup at his Berkshire Hathaway Inc. and fewer acquisition opportunities to spend it on. The last thing he would seem to need is more cash. So it's more than a little ironic that as Buffett searches up and down for his next "elephant," he has in the meantime found himself on the receiving end of a transaction.

Buffett's Berkshire owns approximately 31 percent of Chicago-based USG Corp., a building-materials manufacturer known for brands such as Sheetrock. Berkshire disclosed in a filing Monday that USG received a $42-a-share takeover offer from German rival Gebr. Knauf KG, the company's next-biggest shareholder. Berkshire hasn't agreed to support such a deal, but it did propose selling Knauf a six-month option to buy Berkshire's stake, providing that the suitor buys all of USG's shares for no less than $42 apiece. The option would have an exercise price equal to Knauf's bid, less $2 a share that Knauf would pay Berkshire for the option. 

Shares of USG, which rejected the offer as too low and "opportunistically timed," still surged Monday morning. A deal at $42 a share would value the company at $6.5 billion including debt, or nearly 13 times Ebitda. That's in line with the median takeover multiple paid for U.S. companies so far this year, though keep in mind that acquisition prices in recent years are elevated relative to history. Buffett himself has grumbled about the M&A market's frothiness. 

Berkshire could reap at least $1.8 billion should Knauf buy USG. That's not bad for what began as a cheap, distressed situation and for a business that Buffett last year called disappointing because gypsum prices hadn't climbed as much as anticipated. USG, which Berkshire has owned since 2000, first suffered financial strain due to asbestos lawsuits in the early aughts, finally emerging from bankruptcy in 2006, but not long before getting whacked by the housing crisis.

USG was "not one of my great ideas," Buffett said at last year's annual meeting for Berkshire shareholders when asked about the investment. Debt that Berkshire bought in 2008 converted into USG common stock four years ago, over which time it lagged the broader market. Berkshire also had to pay $896,000 for violating antitrust laws in mistakenly failing to notify federal regulators about the stock conversion. 

For Buffett, selling USG may mean good riddance. Even so, it would add to another headache as he thinks about his succession and legacy: Berkshire's $116 billion cash pile. Buffett expressed frustration in his annual letter last month that takeover candidates are asking for -- and receiving -- offers at prices he simply can't justify, as other CEOs of businesses with slowing growth feel pressured to do deals at whatever the cost. At least in this case Buffett gets to take advantage of it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

©2018 Bloomberg L.P.

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