Business valuation – USG Corporation

USG Corporation (“USG” or the “Company”), through its subsidiaries, manufactured and distributed building materials. USG was the world’s largest gypsum producer. The Company produced a wide range of products for use in new residential, new non-residential, and repair and remodel construction, as well as products used in certain industrial processes. USG’s operations were organized into four operating segments: Gypsum, Interior Systems, Wood Fiber, and Other Products. Takeover Target
USG had been a takeover target primarily due to its steady cash flow, low-cost production lines, and commanding market share. The Company had scale advantages in manufacturing and transportation which kept its costs low. USG had been a vertically integrated company with a commitment to produce diversification. The Company was geographically dispersed, controlling mines, quarries, transport ships and manufacturing plants in North America, Europe, Mexico, and other countries.
USG’s four operating divisions shared the following characteristics: i) had strong positions in their primarily markets, typically first or second; ii) led in technology, design, and innovation; iii) were low-cost producers; iv) had multiple plant locations and geographic coverage; and v) were highly integrated. Therefore, as the leading company in the industry, USG had been one of the most attractive takeover targets. Takeover Attempts Several takeovers and takeover attempts had shaken the building products industry during the late 1980’s.

In 1986, the Belzberg brothers accumulated a large position in USG and threatened takeover. However, they were bought out in a targeted share repurchase and the transaction netted the Belzbergs a tidy profit. On March 1, 1988, Desert Partners, a Texas-based takeover group, announced a tender offer to purchase USG for $42. 0 per share in cash to expire on June 10, 1988.
In addition, in a publicly disclosed letter to the board dated May 4, 1988, Desert Partners had indicated a willingness to increase their offer to $50.0 per share in cash, debt, and stock, but had not officially changed their tender offer. Leveraged Recapitalization Proposal USG resisted Desert Partners’ proposed offer and stated that the tender offer was unsolicited, coercive and inadequate, and recommended that shareholders not to tender their shares. Management made it clear that the Company was not for sale and that the tender offer was not in the best interest of the Company.
After debating a number of alternatives, management decided to counter-propose a leveraged recapitalization of the Company, which was announced on May 2, 1988. According to the plan, shareholders would receive $37. 0 in cash, $5. 0 in stated face amount of new 16% junior subordinated pay-in-kind debentures, and one share in the newly recapitalized company. While in some cases, leveraged recapitalizations are voluntary, proactive efforts, in USG’s case, the proposal was distinctly defensive.
Before the board could implement the leveraged recapitalization, it had to be approved by shareholders at a special meeting on July 8, 1988. On that day, shareholders had to decide whether to tender their shares or vote for the proposed leveraged recapitalization. Historical Financial Analysis Based on the historical financial information given in the case, USG reported stellar results. As the leading company in the industry, USG’s net sales significantly increased from $1. 6 billion in 1983 to $2. 9 billion in 1987.
Operating income (EBIT) increased from $158 million in 1983 to $532 in 1986, but dipped slightly in 1987 to $438 million primarily due to increased costs. Despite the lower net income of $204 million in 1987, versus net income of $226 million in 1986, USG’s return on equity at the end of 1987 stood at 34%, almost twice the average for comparable building products companies. The Company attributed much of its success to increased focus on their core building product business as its share of sales from building products increased from 79% in 1985 to over 90% in 1987.