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The Buffett Put on USG

September 10, 2011 | About:
Josh Zachariah

Josh Zachariah

38 followers
I previously wrote about the investments Warren Buffett had in USG and was mistaken on the claim that Buffet had converted the convertible debt he had on the company. In February of 2009 he lent the company $300 million (with Prem Watsa lending another $100 million) in the form of a convertible bond yielding 10% with a conversion price to common shares at $11.4. The two have not yet exercised this option as the company still shows some $382 million in principal owed relating to those bonds.

This transaction is not unlike Buffett’s other well known convertibles he has with companies like GE, Goldman and Bank of America. But unlike those, he along with Prem Watsa, are both common shareholders in USG. The two make up some 22% of the company’s shares and 16% of its debt. The convertible bonds cannot be exercised any sooner than 2013 and with the price of the stock close to $8 a share it makes no sense to do so. At the time the agreement was made in 2009 the stock was also trading close to the $8 mark.

The 10% bonds are the most expensive credit the company has on its balance sheet. In December of 2010 the company borrowed another $350 million in senior notes at a rate of 8.375% and the company has other bonds with rates ranging from 6.3% to 9.75%. The fact that Watsa and Buffett issued the $400 million in unsecured loans and have retained their common equity position speaks to their confidence in the company. A contraction in employment would certainly hurt the company as demand for housing would contract with it. Both Buffett and the economist Robert Shiller have said that falling employment has a much larger impact on housing than rising interest rates on mortgages.

Below is a risk enumerated in USG’s 2010 annual report. I’m not sure I would consider it a risk that the likes of Prem Watsa and Warren Buffett hold a tight grip on the company, but perhaps to some that may be a concern.

“A small number of our stockholders could significantly influence our business and affairs.

Based on filings made with the SEC and other information available to us, we believe that, as of January 31, 2011, seven organizations collectively controlled over 50% of our common stock. Also, all of our 10% convertible senior notes are currently held by two of our largest stockholders. At the current conversion price of $11.40 per share, the notes are convertible into approximately 35.1 million shares of our common stock, or approximately 25% of the shares that would be outstanding if all of the notes were converted at that price. Accordingly, a small number of our stockholders could affect matters requiring approval by stockholders, including the election of directors and the approval of potential business combination transactions.”

Disclosure: Long USG

Josh Zachariah - for a list of earlier USG articles

About the author:

Josh Zachariah
I credit my father and Warren Buffett for molding me into the investor I am today.

Rating: 4.2/5 (13 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 3 years ago


Buffett has been throwing good money after bad with USG.

Another bankruptcy is a strong possibility unless housing turns around soon, which seems unlikley.

JeanPierreSarti
JeanPierreSarti - 3 years ago
Having ridden the coats of both uncle Warren and uncle Prem I find it very tempting to buy into USG. However, they are much more capable of missing and not feeling the hurt as I would in speculating on the recovery of housing via USG. Does anyone see unemployment recovering anytime soon? Though if Obama wants to hire unemployed construction workers to fix up parts of the country then I suppose building materials will be more in demand.
quanttrader714
Quanttrader714 - 3 years ago
According to USG's 2011 notice of annual meeting of stockholders, Berkshire and Fairfax combined have beneficial ownership of 47.41% of common shares.

https://materials.proxyvote.com/Approved/903293/20110314/NPS_83816/images/USG-Proxy2011.pdf
Josh Zachariah
Josh Zachariah - 3 years ago
I'm going from Yahoo Finance, the 47% may include the convertibles:

Top Institutional Holders
HolderShares% OutValue*Reported
FAIRFAX FINANCIAL HOLDINGS LIMITED6,794,0006.4597,425,960Jun 30, 2011
PRICE (T.ROWE) ASSOCIATES INC4,819,6004.5869,113,064Jun 30, 2011
SASCO CAPITAL, INC.4,218,5894.0160,494,566Jun 30, 2011
STATE STREET CORPORATION3,577,7653.4051,305,150Jun 30, 2011
VANGUARD GROUP, INC. (THE)3,458,2443.2849,591,218Jun 30, 2011
BERKSHIRE HATHAWAY, INC17,072,19216.21244,815,233Jun 30, 2011
BlackRock Fund Advisors1,987,4381.8928,499,860Jun 30, 2011
GW CAPITAL, INC.1,797,9431.7125,782,502Jun 30, 2011
WELLINGTON MANAGEMENT COMPANY, LLP1,785,9501.7025,610,523Jun 30, 2011
BlackRock Institutional Trust Company, N.A.1,765,0671.6825,311,060Jun 30, 2011

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