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.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.