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A Look Back to Warren's Clever USG Play...


BargainValueHunter
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http://www.smartmoney.com/invest/stocks/what-does-warren-buffett-know-that-you-dont-9500/

 

Sure, slowing home sales have depressed such stocks, possibly making them look like bargains to the canny value investor. But his latest purchase has analysts scratching their heads. The price of drywall, also called wallboard, has been falling all year, hurting USG's bottom line. But far more ominous, USG faces the prospect of paying out hundreds of millions of dollars in asbestos liability claims over the next few years. No one knows how much it will ultimately shell out, but the shadow of similar asbestos-related damages has forced one company into bankruptcy and caused the stock prices of several others to plummet this year. "The conventional wisdom is that the asbestos problem will only get worse," says John Kasprzak of BB&T Capital Markets, who has a Hold rating on USG stock.

 

As he said, that's the conventional wisdom. But here's where things get really interesting. Remember that Buffett's Berkshire has extensive insurance holdings. Among them is General Star Indemnity, which underwrote you guessed it asbestos policies. It isn't certain whether the underwriters and actuaries who handle General Star's asbestos liability policies talked to anyone who makes Berkshire's investing decisions (and Berkshire doesn't comment on those decisions). But what seems certain is that Buffett must be more comfortable than most analysts with the level of asbestos-related damages USG will ultimately face.

 

http://articles.moneycentral.msn.com/Investing/CompanyFocus/BattleOfTheBillionaires.aspx

 

Analysts who think Buffett's USG gamble is correct say that the housing downturn is so well known that there's not much downside risk left in the stock. "The whole world has figured that out," says CL King & Associates analyst Jim Barrett. "Everyone knows we are at the top of the cycle, and the stock has sold off severely."

 

By some measures, USG's stock is clearly a value. Analysts like to evaluate economically sensitive companies by comparing enterprise value (EV) to cash flow. (EV is calculated by adding market cap and debt and subtracting cash.) USG trades for an EV that's about 4.4 times its $1.1 billion in cash flow.

 

Here's how cheap that looks now. Back in the mid-1990s -- when dreaded asbestos liabilities still hung over USG -- the company had an enterprise value of five times cash flow. A wallboard company called BPB was recently taken private for an enterprise value of 8.4 times cash flow.

 

And capacity may not be all it's cracked up to be, says Barrett. When wallboard companies build new plants, they will also close older, less efficient ones. And much of the capacity is being built on the East Coast, so it won't affect pricing in other regions (wallboard is so heavy it is hard to ship it long distances). And the new plants are coming on line over two years. By the time they're up and running, the housing market could be back on its feet.

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  • 2 years later...

USG clever? 13 years into the investment, so far it's looking about as clever as USAir or Dexter Shoes.

 

Anybody wonder if now is the time that Buffett finally pulls the trigger and buys out USG

He has held the stock for a decade. He never sold even at $120 per share  which makes me think this was always more than just an undervalued stock to him

He now has a much larger position with the debt swap

He may finally be ready to simply offer to buy the whole company

 

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USG clever? 13 years into the investment, so far it's looking about as clever as USAir or Dexter Shoes.

 

Anybody wonder if now is the time that Buffett finally pulls the trigger and buys out USG

He has held the stock for a decade. He never sold even at $120 per share  which makes me think this was always more than just an undervalued stock to him

He now has a much larger position with the debt swap

He may finally be ready to simply offer to buy the whole company

 

Nope. USG would then lose their NOL's

 

Warren's basis on his 2000 purchase of USG was about $15/ SH, a so so return, but better than the  market average return. He also got a "dividend" of about 3% of the market price of the USG shares  for most years to date as he lent those shares  to the short sellers who have heavily shorted USG's stock most of the time since the year before they went into Cpt. 11 in 2001.

 

BRK also got a fee of $57M(?) or so to backstop USG's rights offering in 2006.  However, the shares he bought through exercise of those rights plus a relatively small number of additional shares soon thereafter, were in the $40+/SH range. The decline on the price of those shares nets out most of the gain on the shares he bought in 2000, but he still got the "dividend" and the backstop fee.

 

The return on his more recent bailout is almost 100 percent on the exercise of his conversion plus the high interest rate on the security to date.  :)

 

Warren's operations with USG is a classic example of how he turns something that almost certainly would be a total loss for most fund managers into a saving construction that produces a modest gain.  All things considered, that's not a bad outcome for an otherwise good company that had to go into chapter 11 to protect itself from mostly bogus asbestos claims and then had to give up about all it's net asset value to resolve those claims while floating a rights and stock offering to repair the hole in its capital.  Not to mention experiencing the biggest collapse in its repair and construction market ever.

 

One of Warren's understudies, Ted Weschler, had a similar and even more difficult situation working through WR Grace's Cpt. 11.  BRK will be in good hands when Warren hangs up his spurs.

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-$400 million combined debt

-Berkshire ownes $300M and Fairfax ownes $100M

-Interest rate is 10%

 

USG is redeeming $325M of notes.  Will they be redeeming all of Berkshire's notes and partial notes owned by Fairfax? I am not sure of the mix.

 

Tks,

S

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-$400 million combined debt

-Berkshire ownes $300M and Fairfax ownes $100M

-Interest rate is 10%

 

USG is redeeming $325M of notes.  Will they be redeeming all of Berkshire's notes and partial notes owned by Fairfax? I am not sure of the mix.

 

Tks,

S

 

BRK will still hold something like $50M(?) in USG notes. Dunno about FFH.

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USG isn't a good business and not only because of asbestos lawsuits and the collapse of construction activity. They are a commodity producer without any significant competitive advantages. Many of their competitors have outperformed them through better financial management, diversification to other products, etc.

 

Like USAir, the only reason Berkshire has done OK is Buffett's ability to make opportunistic distressed deals. Now that they own 30% of equity, the ability to do distressed deals is not going to help, they need the underlying business to perform.

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USG isn't a good business and not only because of asbestos lawsuits and the collapse of construction activity. They are a commodity producer without any significant competitive advantages. Many of their competitors have outperformed them through better financial management, diversification to other products, etc.

 

Like USAir, the only reason Berkshire has done OK is Buffett's ability to make opportunistic distressed deals. Now that they own 30% of equity, the ability to do distressed deals is not going to help, they need the underlying business to perform.

 

Strongly disagree. USG invented the gypsum drywall industry and has generally been the lowest cost producer and distributor of that product with the most recognized brand name, Sheetrock, although there may be a few regional producers that also do well because of geography and transportation costs for a bulky product.

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  • 6 months later...

James Metcalf wants to make USG less cyclical

 

http://www.institutionalinvestor.com/Article/3356447/Banking-and-Capital-Markets/James-Metcalf-Wants-to-Make-USG-Less-Cyclical.html?ArticleId=3356447&p=2#.U8cG3PldWSp

 

“Let me tell you why I wear a tie.” My dad had me work in the steel mill every summer. I was a laborer, and boy, did I do some crap jobs. He said, “I want you to work here every summer so you get your tail back to college and you get a degree so you can have an office job and wear a tie.” That’s why I wear a tie. It’s not because I’m a stiff. It’s a symbol, and it’s a tribute to my dad.

James Metcalf – USG CEO

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