Friday, August 18, 2006

The Story on USG

I did some more digging and found some other interesting details.

USG had entered Chapter 11 back on June 25, 2001 as a pro-active defensive measure against mounting asbestos lawsuits. They have an FAQ's document about it. They were not actually in financial trouble at the time, but all their competitors had already filed Chapter 11, and USG found itself exposed to lawsuits where it would normally have limited or little liability. There were, however, legitimate asbestos claims mixed in with the noise, so USG found itself having to settle every claim that came in the door. Chapter 11 held off those lawsuits while USG came up with a plan for dealing with asbestos claims without short-changing either their creditors or shareholders.

It took 4 1/2 years of legal proceedings and finally on Jan 30, USG proposed a plan to deal with asbestos claims once and for all. It involved setting up a multi-billion dollar trust from which all present and future asbestos claims would be paid. $1.8B of the trust would be funded by a "Rights Offering" in which the right to purchase one (previously unissued) share of USG at $40 was granted to each existing share. So the ability to buy at $40 was available to every shareholder for a limited period of time. The plan was reviewed by the bankruptcy court and ultimately approved by the judge on Apr 10, pending approval by asbestos claimants.

That apparently went through, and on Jun 20, USG announced two things: they had emerged from Chapter 11 bankruptcy and the Rights Offering would be available to shareholders of record on Jun 30 through expiration on Jul 27. This Apr to Jul timeframe is when USG's stock price took that heavy dive, a combination of upcoming share dilution and huge supply at $40, and in Jun options volatility was 100-120% (buy puts!!!!!! sell calls!!!!!!). After Jul 27, part of the Jan 30 plan included the Backstop Commitment with Berkshire, which USG paid $67M for, where Berkshire was obligated to purchase shares under the Rights Offering and purchase any remaining unsold shares. So the 6.9 million share purchase on Aug 2 was a contractual obligation, and it explains why that one transaction more than doubled Berkshire's stake in USG.

So that takes a good bit of the wow factor out. But then, Warren did continue to buy 2 million shares of USG beyond what the Backstop Commitment required, and I somehow doubt it was for covering shorts. Maybe it means he believes the asbestos issues are now totally behind USG? And that mid-$40s is an excellent value for USG?


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