Knauff Offers To Buy USG, Is Buffett On Board?

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Knauff Offers To Buy USG, Is Buffet On Board? - Gabelli Research Analyst Alvaro Lacayo (3-26-2018)


Good afternoon this is Alvaro Lacayo the Housing research analyst at Gabelli & Co. This has been a busy morning for Housing with the main event being an unsolicited offer from Knauff for USG for $42 per share. This price would give USG an enterprise value of $6.6 billion and would have a valuation of about 9.2-9.4x 2019 estimated EBITDA. Subsequently, this bid has been unanimously rejected by the USG board.

What makes this case even more interesting is that it was also reported that Warren Buffett and Berkshire Hathaway offered Knauff a call option for $2 per call to have the rights to acquire Berkshire’s 30.8% stake in the company on the condition that Knauff would bid to buy the entire company for at least $42 per share. On a combined basis the two shareholders own over 41% of USG.

USG, despite having what appears to be two significant shareholders in favor of a transaction, has rejected this offer. Having attended their Investor Day in early March, it is clear to us that USG is optimistic about its prospects. On a consolidated basis they see 4-5% revenue growth and believe they can achieve 300-400 basis points of margin expansion through 2020. If management can achieve their goals the company could potentially generate $750-800 million in EBITDA by 2020. Using a 9.5x EBITDA multiple on that would lead to a valuation a fair amount above $42 per share. Given the strategic fit and motivated shareholders we believe this is just the beginning of a negotiating process as management tries to achieve a higher selling price. It is unclear if Knauff will be willing to increase its all cash bid, but this is their second offer in the past 6 months leading us to believe that it is quite possible something can be accomplished at a higher selling price. We will continue to follow these developments as new information becomes available.

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