UPDATE: Knauf offer for USG (4-12-2018)

UPDATE: Knauf offer for USG (4-12-2018)


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Good afternoon this is Alvaro Lacayo the Housing research analyst at Gabelli & Company. Today we wanted to provide an update on the developments of Knauff’s $42 per share offer for USG. At current price USG has a total enterprise value of $6.6 billion.

As we highlighted in our last video, USG flat out rejected the Knauff deal stating it did not reflect the full intrinsic value of the company. At the time it was said that Buffett had offered Knauff a call option for Berkshire’s 31% stake in the company.

Earlier this week Knauff followed up with a letter urging investors to vote against the four USG board members up for re-election at the annual meeting being held on May 9,2018. The firm alleged that USG was not properly engaging with them with regards to an offer and made their case as to why they believe the offer was fair.

USG responded to this letter by stating they had been engaging with Knauff and even went as far as to say that both financial and legal teams met as early as Last Thursday. Despite that they reiterated their belief that the offer was inadequate.

While Berkshire Hathaway had hinted towards leaning for a deal between Knauff and USG, this morning Berkshire has stated that, like Knauff, will vote against the 4 USG board members up for re-election. We now know that at least 41% of the shareholder base will vote against USG’s slate. This in our view is an escalation in pressure being applied by Berkshire and probably increases the likelihood of a deal getting done.

Even with a successful campaign to block the re-election of the board members USG continues to have several protections including a poison pill as well as a staggered board. These are only 4 of 10 total seats. Ultimately, we believe key shareholders are stepping up the pressure to negotiate increasing the likelihood of consummating a transaction. We also believe USG will work towards maximizing its price. Based on management estimates we believe the firm could potentially generate between 700-750 million in projected EBITDA by 2019, using a multiple of 9-10x you could make a case that intrinsic value may be higher, especially if strength in housing demand continues. While it is unclear if Knauff will move from its current $42 per share we think there continues to be room for negotiation and see better potential for a deal happening in the near term.

Source: Gabelli TV (via YouTube)
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