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Warren Buffett Owns 30% of USG After Converting Crisis-Era Notes

Holly LaFon

The investments of the financial crisis are the bets that keep on giving for Warren Buffett. On Dec. 9, 2013, he converted notes - procured in 2008 - that give his company Berkshire Hathaway (BRK.A)(BRK.B) a 30.5% slice of the largest drywall manufacturer in the U.S., USG Corp. (USG).

On Nov. 28, 2008, Buffett acquired $300 million in USG senior notes with an interest rate of 10% a year, convertible to common stock at $11.40 a share. Concurrently, Prem Watsa's Fairfax Financial Holdings (FFH) bought $100 million in notes at the same terms.

At the time, the buys were seen as a "vote of confidence" for the struggling company, whose products are used in residential and commercial construction, and home remodeling and repair. USG CEO William Foote at the time said in the announcement:

We are gratified by the expression of confidence in USG Corporation by two premier financial institutions. We consider these substantial investments by Berkshire Hathaway and Fairfax as validation of our business strategy and the company's long-term prospects. This transaction provides USG with long-term capital that significantly improves our financial flexibility as we manage through the steep recession in our primary markets."

USG stock, down to around $6 when Buffett bought the notes, has in the past five years traded up 245%, and is at $29.05 a share on Friday, a return to its pre-2008 level.

Buffett was already a significant shareholder in USG. Prior to converting the notes, he owned 17,072,192 shares of the company. His current holding stands at 43,387,982 shares, a 154.14% increase.


For the third quarter, USG reported 12% year-over-year sales growth to $925 million. In 2011 and 2012, its revenue finally began to stabilize after four consecutive years of drops. Net earnings were $23 million, compared to a net loss the previous year of $29 million. Its wallboard shipments increased from 1.2 billion square feet to 1.37 billion square feet, and the average price increased to $154.04 from $131.97.

In the earnings release, USG CEO James Metcalf stressed the company's focus on growth as the housing market rectifies, and to take advantage of opportunities abroad.

"We were hard at work creating a world-leading plasterboard and ceilings joint venture inAsia,Australasiaand theMiddle EastwithBoral Limited, which we announced last week. We kept our focus on our core businesses and saw continued strong results inNorth America, and finally, we launched a dynamic new brand for USG," Metcalf said.

USG is trading with a P/E of 84.8, near a 10-year high measure. It also has a P/B of 68.4 and P/S of 0.09.

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This article first appeared on GuruFocus.

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