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Holly LaFon
Holly LaFon
Articles (8902)  | Author's Website |

Warren Buffett to Vote Against USG Board in Support of Gebr Knauf Takeover

Buffett has held the company since 2000 and wants to sell

April 12, 2018 | About:

Warren Buffett (Trades, Portfolio) decided Thursday to join a shareholder movement against the election of four nominees to U.S. gypsum maker USG (NYSE:USG)’s board that Gebr Knauf KG started earlier this week to gin up support for an acquisition.

“On April 12, 2018, in response to an inquiry from a Bloomberg reporter, a spokesperson for Berkshire stated ‘Berkshire’s present intention is to vote against the four directors proposed by management,’” Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) said in a filing.

Gebr Knauf, a German building materials producer, urged against shareholder support of the nominees to pressure the company to resume talks of its takeover bid that USG had rejected. Knauf offered the company $42 per share in cash, a 25% premium to its $33.51 closing price on March 23, the previous trading day.


In a press release, Gebr Knauf said the price represented a multiple of 11 times USG’s 2017 fully adjusted and actually realized Ebitda, a 30% premium to its 12-month average closing share price and a higher value than its closing share price over the past decade. Gebr Knauf also said it represented “a full and fair value relative to intrinsic long-term value through the cycle.”

In the 10 years ended the day before the takeover offer announcement, USG’s shares had declined by 2%. The company filed for bankruptcy in 2006 as it paid for lawsuits involving its use of asbestos, a building material used until the 1970s that has been faulted for a variety of health problems. According to the New York Times, USG set up a settlement trust for personal-injury claims in 2006 with $900 million in cash and a continent note for $3.05 billion. The financing came from USG’s cash on hand, new long-term debt and a $1.8 billion rights offering to existing stockholders involving Berkshire Hathaway.

In the offering, Berkshire agreed to purchase any shares, priced at $40 each, that investors did not buy to raise $1.8 billion. That amount ultimately totaled 18% of the company. Buffett had begun to purchase shares as early as 2000, near the start of its bankruptcy, when the price ranged from $35.44 to $4.57 per share. On March 26, Berkshire offered to give Knauf the option to purchase all of its shares held at a price of $42 per share.


Despite Buffett’s clear support for the Gebr Knauf deal, USG’s board responded Thursday with a release calling the proposal “substantially below” its intrinsic value. The letter also stated that Knauf’s claim that USG’s board did not “engage in good faith with them” was untrue and that it had “pivoted to a new strategy” to create long-term value.

As part of the plan, USG said it would further cost-efficient advanced manufacturing initiatives and introduce “exciting” new products.

The plan aims to double 2017 free cash flow by 2020 and improve profit margin. USG has generated steady free cash flow over the past three years, with $214 million in 2017, $290 million in 2016 and $244 million in 2015. Operating margins wavered at 11.45% in 2017, which was higher than 71% of companies in the global building materials industry. They totaled 13.06% in 2016 and 12.19% in 2015.

Revenue increased over the past three years, reaching $3.2 billion in 2017 versus $3.02 billion in 2016, as net earnings declined annually, sinking to $88 million in 2017 from $510 million in 2016.


As reported by GuruFocus Real Time Picks, Buffett also increased his position in USG by 11.25% on Thursday, giving him a position of 43,387,980 shares valued at $1.73 billion. With the addition, he owns 31% of the company.

USG has a price-earnings ratio of 68.53, near a two-year high and substantially above the price-earnings ratio for the building materials industry of 18.01, according to the Industry Overview page. Its price-sales ratio at 1.84, is near a 10-year high and above the 1.07 ratio of the industry. Its price-book ratio, at 3.10, also far surpasses the 1.41 ratio of the industry.

USG closed near a 10-year high of $40.76 per share on Thursday.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website

Rating: 4.5/5 (2 votes)



Batbeer2 premium member - 5 months ago


Knauf has long held a 10% stake in USG. Perhaps Knauf gives Berkshire a stake in Knauf itself in exchange for Berkshire's stake in USG..... then they're at 37% or so. Another way to put it is that USG's current board of directors is telling 37% of their shareholders that they're wrong.

That is not going to end well for those directors.

I like USG (less so at current prices) but Knauf is an even better company. It's just that Knauf is not publicly traded.

Thanks for the article, this a story worth following.

Stephenbaker - 5 months ago    Report SPAM

I have never understood Buffett's rationale for the USG investment. Anyone?

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