Knauf's Bid to Buy USG Gets Nasty
USG claims that Knauf's offer is far too low, but we believe it's is fair.
On April 10, Knauf, which in late March had offered $42 per share to acquire USG (USG), sent a letter to USG’s shareholders. Knauf is requesting shareholders vote against USG’s four board of director nominees at the firm’s annual meeting in May. Knauf hopes that a successful “withhold” campaign will bring USG back to the bargaining table. As a reminder, Knauf currently owns approximately 11% and Berkshire Hathaway owns approximately 31% of USG. As previously disclosed, Berkshire is willing to grant Knauf an option to purchase the firm’s entire USG position if Knauf purchases 100% of USG’s outstanding shares for at least $42 per share.
In its letter to USG shareholders, Knauf states that despite Berkshire’s “public validation” of the Knauf offer's value, USG’s board rejected the offer without engaging in meaningful discussions. Knauf also contends it could be willing to increase its offer if it had access to non-public information protected by a non-disclosure agreement, but USG has refused to accommodate that request. In a subsequent press release and 8-K filing, USG refutes Knauf’s claims of an uncooperative board and executive management team and asserts that Knauf’s offer significantly undervalues USG.
We are maintaining our $42 per share fair value estimate, which assumes a 50% probability that the Knauf proxy campaign is unsuccessful and the firm abandons further efforts to acquire USG (in which case we’d revert back to our previous $38 per share fair estimate) and a 50% probability that a deal is made at a price ranging between $42 and $50 per share. Our “no deal” fair value estimate of $38 gives USG credit for achieving its 2020 financial goals, but we also moderate our profitability assumptions near the end of our 10-year explicit forecast horizon to account for USG’s cyclicality and its lack of an economic moat, in our view. Based on these assumptions, we believe Knauf’s offer is about fair.
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Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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