Buffett to Oppose USG Board in Support of Knauf Acquisition – Manufacturing News

on Apr13

12 April 2018 | 3:00 pm

(Bloomberg) — Berkshire Hathaway Inc. plans to oppose USG Corp.’s board nominees, backing a shareholder revolt that flared after the wallboard maker spurned a takeover bid from Germany’s Knauf. USG shares jumped.

Knauf, which owns about 10 percent of USG, is calling for investors to reject the slate in an election next month as a way to pressure the company into accepting the $5.9 billion deal.

“Berkshire’s present intention is to vote against the four directors proposed by management,” Debbie Bosanek, an assistant to Berkshire Chief Executive Officer Warren Buffett, said in an email Thursday. Berkshire holds 31 percent of Chicago-based USG.

Knauf offered to buy USG for $42 a share, Berkshire revealed in a regulatory filing last month. Berkshire indicated it would accept that amount if a sale is approved.

“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.

USG rose 2.4 percent to $40.76 at 11:41 a.m., after reaching $41.45, the highest intraday since August. The shares closed at $33.51 on March 23, the last trading day before Berkshire made the acquisition talks public.

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

EXIT OPPORTUNITY

A deal would untangle Berkshire from what Buffett has called a “disappointing” investment. USG went bankrupt in 2001 under the weight of asbestos litigation settlements, before re-emerging in 2006. Two years after that, it needed a Buffett bailout after the U.S. housing market imploded.

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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.

Although Berkshire’s support of Knauf puts pressure on USG, it doesn’t give the German company fuel to make a hostile move. It’s too late to propose an alternative board slate and the nominees can become board members 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 its first 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 to shareholders.

“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 meeting for an agreement to be reached, said Garik Shmois, an analyst with Longbow Research. Knauf has some room to sweeten its offer and USG may succumb to pressure to accept it, especially if it’s clear that a majority of shareholders will vote against the board nominees, he said.

“I don’t think the USG board holds on for too much longer if it doesn’t go in their favor,” he said.



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