Commentary: Is the Time at Hand for Berkshire to Cash Out of USG?

(BRK.A), (BRK.B)

Gypsum rock and plaster manufacturer United States Gypsum Company soared today as news that Warren Buffett had offered Berkshire Hathaway’s 30% stake in the company to USG’s other major minority stakeholder, Knauf Entities.

Knauf has long been a potential suitor of USG, and was interested in acquiring the company as far back as 2000, when Berkshire first took a 14% stake.

Berkshire reportedly offered its shares to Knauf at $42 per share, which was roughly 19% above the stock’s closing price on Friday, March 23.

USG’s Board of Directors’ weighed in with their own statement, as they moved to squash the deal.

“The board carefully evaluated it and determined that it substantially undervalues the company and is not in the best interests of all of USG’s shareholders.”

Instead, they suggested that its own plans would be the best way to boost shareholder value.

One thing seems clear, after 17 years riding this stock up and down, Buffett is finally ready to move on.

If it does complete the deal with Knauf, not only would Berkshire make money on its investment, but it’s already made a lot of money even though the stock does not pay a dividend.

The Great Recession, 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 another bankruptcy. The day of transaction the stock soared 22% to $6.89 a share.

Today, the stock is hovering around $40 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 roughly 30.8%.

Back in 2015 and again in 2016, I wrote that perhaps it was time for Berkshire to buy the rest of USG, as the housing market had revived from its Great Recession doldrums.

However, at Berkshire’s 2017 Annual Shareholders’ Meeting, Buffett was less than enthusiastic about USG.

Buffett commented in answer to a shareholder’s question that buying into USG wasn’t one of his “brilliant ideas,” stating:

“On USG we owned a very significant percentage like 30%. USG overall has been disappointing because the gypsum business has been disappointing. I think they went bankrupt twice because they had too much debt. It has not been a brilliant investment. If gypsum went up to what it was some years on the past, we would have done a lot better. Gypsum has taken a real dive several times and there has been too much gypsum capacity, and when it comes back the management have been not only of use but have gotten more optimistic than they should have. It’s a business where the supply has been significantly greater than the demand in a lot of years. You’ve seen housing starts since 2008-9 not come back anywhere near where people anticipated, so gypsum prices have not moved up dramatically. So just put that one down as not one of our brilliant ideas. Not a disaster.”

Perhaps with USG again in play, it just got brilliant again.

© 2018 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.

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