EUR 850.00 For Business Accounts Only

Morningstar | Knauf's Acquisition of USG Should Close in Early 2019

USG turned the page with the sale of L&W Supply, which closed in the fourth quarter of 2016. We view the sale as overwhelmingly positive for several reasons. First, the segment was a large drag on USG’s profitability and return on invested capital, and its sale will result in a more profitable and capital-efficient company. Second, in our view, USG received an extremely good price on the deal (at 12.9 times trailing EBITDA). The company used the proceeds (tax-free thanks to USG’s large net operating loss carryforward position, or NOL) to pay down about $1.1 billion of debt, which allowed the company to finally achieve its targeted leverage ratio of below 2 times. Third, the company is able to redeploy capital previously earmarked for debt service and L&W operations on higher returning projects. USG announced its advanced manufacturing initiative which will modernize and automate its manufacturing operations. The company intends to invest $300 million in capital expenditure on this initiative over the next 3-4 years and expects to achieve $100 million annual EBITDA savings by 2020. Fourth, the sale eliminates long-standing channel conflicts, which suppressed the company’s full sales potential. L&W Supply competes with many of USG’s customers, and the elimination of this conflict should serve to strengthen USG’s customer relationships and boost sales. Finally, L&W’s acquirer, ABC Supply, will become a large and important customer for USG, and we think the partnership will serve to bolster USG’s market presence.USG's growth and profitability depend highly on the strength of U.S. residential and commercial construction and repair and remodel, or R&R, spending. Given our still favorable U.S. housing outlook, which projects starts to reach 1.6 million units by 2022, and our expectations for stable commercial construction spending and mid-single-digit R&R growth, USG's prospects are good, especially with its improved financial flexibility.On June 11, USG announced that it has agreed to be acquired by Knauf, a Germany-based, family-owned building materials company, for $44 per share, which we view as a fair price.