BRK.B Berkshire Hathaway Inc

By Cara Lombardo 

USG Corp. rejected a buyout offer from Germany's Gebr. Knauf KG, saying the proposal "substantially undervalues" the building-materials company.

But with USG's largest shareholder, Berkshire Hathaway Inc., potentially open to selling its stake, analysts say a deal could get done at a higher price. Knauf already owns a 10.5% stake in USG and Warren Buffett's Berkshire Hathaway owns 30.8% of the company.

USG is open and engaged in reviewing any proposal it receives, according to people familiar with the matter.

A hostile takeover bid is unlikely and any deal would require 80% shareholder approval, Jefferies analyst Philip Ng said in a Monday research note, as Knauf is an interested shareholder and USG's board has recently been re-elected.

"We believe this deal ultimately gets done at a higher price and will hinge on its shareholders pressuring the board to sell," Mr. Ng wrote.

Chicago-based USG said Monday its board unanimously rejected a March 15 offer from Knauf to buy the rest of the company for $42 a share. The offer topped a November offer of $40.10 a share and would have been a 25% premium over Friday's closing price of $33.51.

Instinet analyst Michael Wood said in a Monday research note he expects Knauf to increase its offer to about $44 a share or more.

USG shares closed Monday up 20% at $40.03.

USG Chief Executive Jennifer Scanlon said in a letter to Knauf executives that the company's board and management believes its long-term plan will deliver more value to shareholders than Knauf's latest offer.

USG, which makes wallboard, ceiling board and other construction materials, has benefited as U.S. housing starts have started to rebound since the last recession. The company has been touting expanded offerings like premium, lighter-weight wallboard and plans to trim costs.

Berkshire Hathaway brought the discussions into public view Monday when it disclosed in a securities filing it proposed granting an option to Knauf to buy its stake in USG. The option would be exercisable only if Knauf buys all shares outstanding in USG that it doesn't own for at least $42 a share.

Under the Berkshire proposal, Knauf would pay $2 per share for the option, which would be exercisable at $40 per share, or a combined price of $42 per share.

Berkshire shares rose 3.6% Monday to $199.34.

Executives from Knauf and the related C & G Verwaltungs GmbH have "from time to time, beginning many years ago" contacted Mr. Buffett, Berkshire's chief executive, to describe their potential and conditional interest in a transaction with USG, Berkshire said in its filing.

Berkshire in 2014 agreed to pay a nearly $900,000 penalty to settle U.S. allegations it violated antitrust laws by failing to report the acquisition of an equity stake in USG. The issue came when Berkshire converted notes it had purchased from USG into equity.

Write to Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

March 26, 2018 17:20 ET (21:20 GMT)

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