Commentary: Is Now the Time for Berkshire to Pull the Trigger on USG?

(BRK.A), (BRK.B)




With demand for housing finally outstripping supply in a number of markets, the need for drywall and other construction supplies looks finally to be reviving from the lingering doldrums of the Great Recession.

Building permits for new houses rose a stellar 30-percent in June 2015, as compared to the same time period in 2014.

The rise in new housing starts, which are up 26-percent year-to-year, is certainly welcome news for Berkshire Hathaway’s Johns Manville, which makes insulation and roofing products, and it’s good news for many of Berkshire’s Marmon Group companies that manufacture materials used in both commercial and residential construction.

The revival in new housing is also great news for USG Corporation (formerly known as United States Gypsum Corporation), which is North America’s leading manufacturer of drywall and related building products.

About USG

In 1902, 30 independent gypsum rock and plaster manufacturing companies merged to form the United States Gypsum Company.  Over more than a century, USG has been issued 1,100 patents for its products. In addition to drywall, the company is a leading manufacturer of acoustical panel and specialty ceiling systems. The company has 34 manufacturing plants in the U.S., and has roughly 9,000 employees in more than 30 countries.

USG and Berkshire

Berkshire played a key role in saving USG during the nadir of the Great Recession.

In 2008, with the housing market imploding and lending all but frozen, Berkshire came to USG’s rescue with $300 million of convertible notes that paid Berkshire 10-percent interest.

At the time, the boost in confidence the company received from Warren Buffett’s financing helped the company avoid bankruptcy. The day of transaction the stock soared 22-percent to $6.89 a share.

Today, the stock is hovering around $29 per share.

Berkshire has not only profited from the healthy interest payments, but the stock’s appreciation as well.

In December 2013, Berkshire exchanged $243.8 million of the convertible notes for common stock, and with additional purchases its stake in USG now sits at just under 40-percent.

The Chinese Drywall Scandal

As an American manufacturer, USG has been a beneficiary of the Chinese drywall scandal that came to a head in 2009. Imported drywall from China that had high sulfur content brought reports of fumes that created upper respiratory problems, and the market for drywall from China was hit hard. Thousands of homes in Florida and other states had their drywall ripped out and replaced.

Time to Pull the Trigger?

The Chicago-based company has seen its ups and downs, including three bankruptcies.

The last bankruptcy was in July 25, 2001 under Chapter 11 in order to deal with a mountain of asbestos litigation costs related to asbestos containing joint compounds.

The establishment of the The United States Gypsum Asbestos Personal Injury Settlement Trust put the company’s asbestos woes in the rear-view mirror, and its stock price reflects it. With the growing strength in the new housing market, its roughly $29 share price looks poised to move past the 5-year high of $35.33 that it hit in February 2014.

With a Market Cap of just over $4.2 billion ($1.5 billion of which is already owned by Berkshire), USG is a great fit for Berkshire if it wants to gobble up the whole thing, or if it just wants to continue its incremental takeover by moving to over 50-percent ownership.

USG would fit nicely into the Marmon Group of companies, which include a host of companies that supply the construction industry.

Berkshire might want to consider a tender offer for the company’s outstanding stock, because it just looks to get more expensive from here, as the housing market finally has put the drywall business back in high demand.

All it takes is a little cash, which is something Berkshire’s got a lot of.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.