Following up on my previous articles on the cheapness of USG here and here, the stock has only gotten cheaper, bottoming out in the high $7s.
I was doing some further research into the transaction Warren Buffett and Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) had in which he converted Berkshire's holding of USG debt into common shares. Buffett had earlier purchased USG at prices in excess of $40 a share, but remained bullish about the company, so much so that he reduced the seniority of his claim against the company (from debt to equity).
The move in itself is quite risky if he felt the company would not survive a prolonged recession. Surely the move would alleviate the stress on the company as interest payments would be reduced, but he may not have expected so a long housing recession as the company has continued to struggle to return to the black.
Below is part of the terms detailing the transaction between Berkshire and USG. We see the exercise price was at $11.40. At today’s price of $8.6 a share there exists a margin of safety from the price Buffett paid at close to 25%. Keeping in mind this transaction took place in February of 2009 there exists either a tremendous margin of safety or miscalculation on Buffett’s part. I would predict the former is the case. Even the housing recovery has taken longer than Buffett estimated.
Quoting directly from the 2009 SEC 13 D form submitted by USG corp:
“On November 21, 2008, Berkshire and USG entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), pursuant to which, and subject to the terms and conditions thereof, Berkshire agreed to purchase Notes in an aggregate principal amount of $300 million, and USG agreed to sell Notes in an aggregate principal amount of $300 million dollars, for an aggregate purchase price of $300 million. On November 26, 2008, BH Nebraska purchased $160 million aggregate principal amount of the Notes, BH Assurance purchased $90 million aggregate principal amount of the Notes, and General Re Life purchased $50 million aggregate principal amount of the Notes.
Following stockholder approval of the issuance of shares of Common Stock upon conversion of the Notes at a special meeting of the USG stockholders held on February 9, 2009, the Notes became convertible into Common Stock at the option of BH Nebraska, BH Assurance and General Re Life at any time prior to the close of business on the business day immediately preceding the final maturity date of the Notes (December 1, 2018), unless the Notes are earlier repurchased or redeemed by USG, subject to the terms and conditions set forth in the indenture and the supplemental indenture governing the Notes (the “Indenture”). The Notes are convertible into Common Stock at an initial conversion price of $11.40 per share, subject to adjustments as set forth in the Indenture.
On November 26, 2008, Berkshire and USG entered into an Amended and Restated Registration Rights Agreement (“Registration Rights Agreement”), pursuant to which USG has granted BH Nebraska, BH Assurance and General Re Life certain registration rights with respect to its shares of Common Stock and the Notes. The Registration Rights Agreement amended and restated in its entirety that certain Registration Rights Agreement, dated as of January 30, 2006, between USG and Berkshire.”
If there are any bears on the company I would love to hear your opinion. I've since liquidated my cherished positions in Berkshire, Walmart (WMT, Financial) and Kraft (KFT, Financial) and plowed into USG. If I'm not seeing something I'd love to know what it is.
Disclosure: Long USG
Josh Zachariah
I was doing some further research into the transaction Warren Buffett and Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) had in which he converted Berkshire's holding of USG debt into common shares. Buffett had earlier purchased USG at prices in excess of $40 a share, but remained bullish about the company, so much so that he reduced the seniority of his claim against the company (from debt to equity).
The move in itself is quite risky if he felt the company would not survive a prolonged recession. Surely the move would alleviate the stress on the company as interest payments would be reduced, but he may not have expected so a long housing recession as the company has continued to struggle to return to the black.
Below is part of the terms detailing the transaction between Berkshire and USG. We see the exercise price was at $11.40. At today’s price of $8.6 a share there exists a margin of safety from the price Buffett paid at close to 25%. Keeping in mind this transaction took place in February of 2009 there exists either a tremendous margin of safety or miscalculation on Buffett’s part. I would predict the former is the case. Even the housing recovery has taken longer than Buffett estimated.
Quoting directly from the 2009 SEC 13 D form submitted by USG corp:
“On November 21, 2008, Berkshire and USG entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), pursuant to which, and subject to the terms and conditions thereof, Berkshire agreed to purchase Notes in an aggregate principal amount of $300 million, and USG agreed to sell Notes in an aggregate principal amount of $300 million dollars, for an aggregate purchase price of $300 million. On November 26, 2008, BH Nebraska purchased $160 million aggregate principal amount of the Notes, BH Assurance purchased $90 million aggregate principal amount of the Notes, and General Re Life purchased $50 million aggregate principal amount of the Notes.
Following stockholder approval of the issuance of shares of Common Stock upon conversion of the Notes at a special meeting of the USG stockholders held on February 9, 2009, the Notes became convertible into Common Stock at the option of BH Nebraska, BH Assurance and General Re Life at any time prior to the close of business on the business day immediately preceding the final maturity date of the Notes (December 1, 2018), unless the Notes are earlier repurchased or redeemed by USG, subject to the terms and conditions set forth in the indenture and the supplemental indenture governing the Notes (the “Indenture”). The Notes are convertible into Common Stock at an initial conversion price of $11.40 per share, subject to adjustments as set forth in the Indenture.
On November 26, 2008, Berkshire and USG entered into an Amended and Restated Registration Rights Agreement (“Registration Rights Agreement”), pursuant to which USG has granted BH Nebraska, BH Assurance and General Re Life certain registration rights with respect to its shares of Common Stock and the Notes. The Registration Rights Agreement amended and restated in its entirety that certain Registration Rights Agreement, dated as of January 30, 2006, between USG and Berkshire.”
If there are any bears on the company I would love to hear your opinion. I've since liquidated my cherished positions in Berkshire, Walmart (WMT, Financial) and Kraft (KFT, Financial) and plowed into USG. If I'm not seeing something I'd love to know what it is.
Disclosure: Long USG
Josh Zachariah
