Wood fiber Masonite Corporation|Corporate Financial
Research Associate Tara L. Nells prepared this case under the supervision of Professor Benjamin C. Esty as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The case was prepared solely on the basis of public information without USG Corporation’s participation.
Copyright © 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
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USG Corporation
On May 2, 1988, USG Corporation, the world’s largest gypsum producer, announced that the board of directors had approved a recapitalization plan. According to the plan, USG would exchange each outstanding share of common stock for $37.00 in cash, $5.00 in stated face amount of 16% junior subordinated pay-in-kind debentures, and one share in the newly recapitalized company. Robert Day, USG’s Chairman and CEO, said the plan “is consistent with our commitment to maximize value for the shareholders while at the same time leaving them with an ongoing equity stake.”1 On the day of the announcement, the stock price closed at $41.50, up $0.50. Before the board could implement the recapitalization, shareholders would have to approve it at a special meeting on July 8, 1988.
The recapitalization, however, was not the only option available to shareholders. Desert Partners, a Texas-based takeover group, had an outstanding tender offer for $42.00 per share in cash due to expire on June 10, 1988. In a publicly disclosed letter to the board, they had indicated a willingness to increase their offer to $50.00 per share in cash, debt, and stock, but had not officially changed their tender offer. Prior to the expiration of the tender offer, shareholders had to decide whether to tender their shares to Desert Partners or wait and vote for the proposed leveraged recapitalization plan in July.
Company History
In 1901, thirty-five gypsum companies consolidated to form the USG Company. The resulting entity controlled 50% of the highly competitive and price-sensitive gypsum market. Due to its size, USG had scale advantages in manufacturing and transportation which kept its costs low and helped it survive the Depression. Since its creation, USG had been a vertically integrated company with a commitment to product diversification. It grew steadily from the 1940s through the 1980s by expanding existing businesses and acquiring new businesses For example, USG acquired Masonite Corporation, a manufacturer of wood building products, in May 1984 to expand its product line.
Overview of Current Businesses
USG manufactured a diverse group of building materials for residential construction (36% of sales), nonresidential construction (29% of sales) , building repair and remodeling (25% of sales), and industrial processes (10% of sales). It was vertically integrated and geographically dispersed controlling mines, quarries, transport ships and manufacturing plants in North America, Europe,
1 Anonymous, “USG Board Announces Recapitalization, Restructuring,” PR Newswire, May 3, 1988.
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Mexico, and other countries. Despite the foreign operations, 90% of the company’s sales were in the United States and Canada. Exhibit 1 gives historical data on the building products industry and the gypsum market.
USG divided its operations into four divisions: gypsum, interior systems, wood fiber and other products. The four divisions shared several characteristics: they had strong positions in their primary markets, typically first or second; led in technology, design, and innovation; were low-cost producers; had multiple plant locations and geographic coverage; and were highly integrated. 2
Gypsum United States Gypsum Company was the world’s largest manufacturer of gypsum products. Each year the company mined over eight million tons of gypsum and used it primarily to produce wallboard, baseboard, and “sheetrock” (USG’s trademark product name), the plasterlike materials used to construct ceilings and walls . Besides being the raw material for construction materials, gypsum was also used in road repair, ceramics, and even as a calcium supplement for McDonald’s hamburger buns. As of 1987, the company had more than 30 years of proven gypsum reserves.
In 1987, US Gypsum was market leader as it had been for decades. It was the largest of 16 domestic producers and controlled one-third of the domestic market, a market where firms competed on price, quality, and service. Currently, gypsum sales accounted for 51% of USG Corporation’s total sales though the division was set to expand as it had increased capacity by 893 million square feet over the past five years by constructing five new plants.
Interior systems Established in 1986, USG Interiors, Inc. was the largest domestic producer of integrated interior systems. It provided ceiling, wall, and floor systems for office, retail and commercial spaces. The company supplied not only the products, but systems for solving interior spacing projects. It distinguished itself from competitors by possessing the largest variety of products and coordinating them into an overall system. USG also attributed its success to its effective marketing, sales, and distribution. Although its market share varied according to the product, it controlled 35% of the market for acoustical ceiling tile, 50% of the market for ceiling grid suspension systems, and 19% of the market for floor access systems.
Wood fiber Masonite Corporation was one of the world’s largest manufacturers of wood fiber products including hardboard siding, roofing, and paneling. It produced and marketed a wide variety of products through three units: Hardboard Group, Wood Fiber Industries, and Furniture Components Group. Masonite invented the process for hardboard over fifty years ago and continued to be innovative with its recently developed successful line of molded door facings. In 1987, it was the domestic market leader with 33% of the exterior hardwood siding market.
Other products USG Industries supplied building products to the repair and remodeling market through three business units: Kinkead Division, DAP Inc., and Durabond Division. The Kinkead Division was the nation’s largest manufacturer of bathtub and shower enclosures. In 1987, it introduced a steam shower and a new line of bath products which resulted in a 19% increase in unit sales. USG acquired the second unit, DAP Inc., in 1987. It produced caulks, glazing and sealing compounds, wood preservatives, and specialty paints. Over 70% of its sales were to the repair and remodel market. And finally, the Durabond Division produced adhesives, mortars and grouts.
2 USG Corporation, 1987 Annual Report, p. 4.
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Current Events at USG
In 1985, former CEO Edward Duffy began a major restructuring program beginning with a reorganization into four divisions under the USG holding company. The restructuring was not a reaction to negative performance, as sales and earnings were at record levels in 1984, but rather a continuation of USG’s long-term decentralization program and an attempt to get each subsidiary to focus on growth opportunities within their specific markets. When Duffy retired in June 1985, then President Robert Day became CEO and took responsibility for implementing the program.
As part of the restructuring, USG closed several plants, eliminated overhead positions, and divested several unprofitable businesses. Management expected these steps to generate $23 million in annual cost savings by 1988. At the same time, the company invested aggressively to improve efficiency and expand capacity at USG’s plants. It also announced plans to repurchase 20% of the outstanding common stock because, in management’s view, the stock was undervalued.3
Following the implementation of the restructuring program, USG posted record profits in 1985 and 1986. During this period, its stock price outperformed both the S&P 500 and the S&P Building Products Index. By the end of 1986, USG had repurchased almost the full 20% of its stock. Although analysts praised the company’s performance, insiders reaped little in the way of financial rewards as they collectively owned only 1.4% of the common stock. They did, however, hold options on another 980,000 shares.
Earnings dipped slightly in 1987: USG earned $204 million on $2.9 billion in sales down from $226 million on $2.8 billion in sales the year before. (Exhibits 2 , 3, and 4 present historical income statements, balance sheets, and divisional operating results.) Nevertheless, its return on equity, measured on end of year equity, stood at 34%, almost twice the average for comparable building products companies. In fact, its return on equity placed it seventh on the Fortune 500 listing of profitability and fourteenth on the list in terms of 10-year EPS growth. At the annual meeting in May 1987, Day boasted that the stock price was up nearly fivefold over the past decade and the dividend had increased 87% over the past five years.4 Management attributed much of the success to increased focus on their core building product business: its share of sales from building products increased from 79% in 1985 to over 90% in 1987. Although analysts were expecting strong earnings into the future, they were projecting a slight decline in 1988 earnings per share from $3.96 to $3.46, some of which was attributable to restructuring expenses.
Management raised one concern in the 1987 Annual Report which was lawsuits stemming from asbestos-related products. The company had been charged a total of $956,000 in three separate cases all of which were currently under appeal. To cover potential liability stemming from future lawsuits, USG purchased additional liability insurance. Management believed that current and future asbestos litigation would not have a “material adverse affect on the company’s operations.”5
Recent Takeover Attempts
Beginning in 1986, the building products industry became a hotbed for takeover activity. In January, Amsted Industries announced a leveraged buyout after Houston investor Charles Hurwitz made a hostile tender offer. In April 1986, California-based Wickes Corporation made the first of two tender offers for building products companies. First, they bid $1.2 billion for National Gypsum which, like Amsted Industries, fought back with a leveraged buyout; second, they bid $2.2 billion for Owens-Corning Fiberglass Corporation which countered with a leveraged recapitalization plan.
3 USG Corporation, 1987 Annual Report, p. 7. 4 Matt O’Connor, “Texans Drilling New Well at USG,” Chicago Tribune , October 11, 1987, p. 1. 5 USG Corporation, 1987 Annual Report, p. 29.
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As the leading company in the industry, USG was not immune to the takeover activity. In November 1986, three Canadian brothers, Samuel, William, and Hyman Belzberg, announced they owned just under 5% of USG’s stock. Although the Belzbergs were notorious for taking toe-hold positions in firms and seeking greenmail, they did, on occasion, actually follow through and acquire firms. After initially trying to rebuff the Belzbergs, USG eventually agreed to buy back their 3.1 million shares for $45.00 per share. On the day USG announced this deal, its stock price fell $1.87 to close at $43.00 per share. USG spokesman Paul Collitti said “We definitely would not call it greenmail . . . USG paid the price that prevailed on the New York Stock Exchange . . . the day the deal was consummated.”6 The Belzbergs netted over $35 million from the transaction.7
But the interest in USG did not subside. Analysts agreed that “its steady cash flow, low-cost production lines, and commanding market share deemed it a desirable company.”8 According to Lawrence Horan, an analyst at Smith Barney, “It’s been one of the most attractive targets on the street.”9 On October 5, 1987, an investor group named Desert Partners announced that it controlled 9.83% of the company. USG’s stock closed up $3.00 at $54.50 that day even though there had been rumors for weeks that someone was acquiring shares. In response to the announcement, one USG executive publicly stated that USG had no intention of participating in any deal with Desert Partners.
Desert Partners, an investment partnership formed by Texas oilmen Jack Brown and Cyril Wagner, was an experienced takeover firm having made several attempted acquisitions over the past few years. After acquiring sizable positions in target firms, they often agreed to sell their shares back to the company for a profit. For example, they made $50 million in December 1986 by selling shares back to Lear Siegler and another $77 million in April 1987 from GenCorp.
The group had been acquiring shares since August and intended to gain all, or at least a controlling portion, of USG which they saw as undervalued. They had paid an average of $40.00 dollars per share for their shares and were expected to offer significantly more to acquire USG. Jonathan Goldfarb, an analyst at Merrill Lynch, concluded that based on cash flow, an acquirer might pay a price in the $60’s for USG.10 However, three weeks after Desert Partners announced their holdings, the stock market crashed and USG fell to a low of $26.50 per share creating a sizable paper loss for the investors. In response, they quickly shelved any thoughts of a takeover.
Over the next several months, USG’s stock steadily climbed back to the high $30s. On March 1st, Desert Partners announced a tender offer to purchase up 21.5 million shares at price of $42.00 per share in cash. The offer was contingent on the removal of USG’s “poison pill” anti-takeover plan which the board had approved in early 1986. USG closed at $40.13 that day, up $2.75 on a day the S&P 500 was flat.
After USG’s board announced the tender offer was not in the best interest of the Company and recommended that shareholders not tender their shares, Desert Partners upped the ante by announcing a proxy contest for the upcoming annual meeting. Desert Partners would run a slate of six new directors hoping shareholders would replace the existing ones. Again, USG encouraged shareholders to vote for the existing directors as the election of the opposing slate was not in the Company’s best interest . “Management is the most qualified to deliver to shareholders the long term value inherent in the corporation and would at the same time be sensitive to the needs of employees, customers and the communities in which it operates, as well as other corporate constituencies.” 11 Exhibit 5 shows USG’s stock price over this period.
6 Robert J. Bennett, “USG Buys Belzbergs’ Shares,” The New York Times , December 4, 1986, p. D1. 7 Cal Mankowski, “USG Seen by Analysts as Tempting Takeover Target,” Reuters, October 6, 1987. 8 ibid . 9 ibid . 10 ibid . 11 Anonymous, “USG Board Announces Recapitalization, Restructuring,” PR Newswire, May 3, 1988.
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Recapitalization Proposal
Given the recent takeover attempts, USG’s board debated a number of alternatives. They considered repurchasing additional stock, selling equity to a friendly third party, selling the entire company to a friendly acquirer, and completing a leveraged recapitalization.12 According to market rumors, U.K.-based BPB Industries was a possible “white knight.” Analysts saw it as a possible acquirer because the chairmen sat on each other’s boards.
After debating each of the options, the board decided to proceed with a leveraged recapitalization and announced the plan on May 2, 1988. They described the plan as “an alternative to an unsolicited, coercive and inadequate tender offer.”13 It was “intended to provide…shareholders with a significant distribution of cash and securities and permit them to retain their proportionate long-term equity interest in the Company.”14 The next day the stock closed at $44.63, up $3.13.
According to the plan, shareholders would receive $37.00 in cash, $5.00 in stated face amount of new 16% junior subordinated pay-in-kind debentures due 2008, and one share in the newly recapitalized company for each existing common share. To finance the deal, USG had to raise approximately $2.5 billion which would come from one of three sources (see Exhibit 6a). Citibank, Bankers Trust, and Chemical Bank would coordinate a group of banks to provide $1.6 billion of bank financing and an additional $200 million of revolving credit if it were needed. These loans would be repaid over the next nine years, with $700 million due in the first two years (see Exhibit 6b). Because many of the loans had variable rates, the banks required USG to lock in fixed rates using swaps, caps, or other instruments for a period of four years for 75% of the principal. In addition, USG planned to issue $600 million of senior subordinated debentures. The debentures would have a 12-year maturity and carry a rate of approximately 14%. Finally, USG would issue $259 million of junior subordinated debentures directly to current shareholders. The junior subordinated debentures were pay-in-kind securities with a rate of 16% and a 20-year maturity. For the first five years, the company could either pay cash or issue additional debentures to cover interest payments. After raising this debt and paying the cash dividend, USG would show a negative book value of $1.57 billion, equal to negative $29.06 per share compared to a positive book value of $13.00 per share in June 1988.
Goldman Sachs and Salomon Brothers advised USG on evaluating Desert Partner’s tender offer, which they said was inadequate, and in developing the recapitalization plan. In formulating the plan, they relied on financial projections, comparable transactions, and trading multiples, all in the context of the current interest rate environment (see Exhibits 7, 8a, 8b, and 9 ). Total fees for the deal related to advisory work and debt issuance were expected to be $71.2 million.
Besides the financial aspects of the deal, the board also highlighted some of the operating changes associated with the recapitalization. They would install a new performance incentive plan for about 215 senior managers and amend the current benefits and stock option plans. They also proposed selling three subsidiaries (Masonite in the Wood Fiber division, Kinkead in the Other Products division, and Marlite in the Interior Systems division) which was expected to generate $519 million after taxes. Collectively, these subsidiaries had $627 million in sales and generated $56 million in operating profit. As part of this restructuring, the company would discontinue any products and distribution channels that failed to pass certain stricter investment criteria. And finally, they would reduce capital expenditures by up to $100 million per year and operating expenses by $70 million per year. Most of the operating savings would come from layoffs and early retirement.
12 Anonymous, “USG Will Continue to Explore Alternatives,” Reuters Financial Service, April 13, 1988. 13 Anonymous, “USG Has Anti-takeover Restructuring Plan,” Reuters Financial Service , May 2, 1988. 14 USG Corporation, Prospectus, July 7, 1988.
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Some analysts suggested that the proposed recapitalization would burden the company with debt, forcing it to sell profitable business units. 15 Day countered this criticism by saying that “Because each USG company is a market leader, USG is well positioned to manage operations with a more leveraged balance sheet.”16 To bolster his point, USG hired American Appraisal Capital Services, Inc. to review the proposed transaction. Their opinion stated that the fair salable value of the company’s assets would exceed the company’s stated liabilities, that the company would be able to pay its obligations as they became due, and that the company would not have an unreasonably small capital base to conduct business after the recapitalization.17
Conclusion
On May 4th, Desert Partners sent a letter to USG’s board proposing a two-tiered transaction in which they would pay $50.00 per share in cash for 72% of the shares, and subordinated pay-in- kind debentures and new common stock for the remaining 28% of the shares. Although they proposed this transaction, Desert Partners did not amend its tender offer which meant that its cash offer of $42.00 per share remained the only official offer. Once again, Day emphatically rejected the proposed offer. He said, “Let us make it clear. The company is not for sale.”18
At the annual meeting, shareholders voted on the competing board slates. Two weeks later, on May 28, 1988, USG announced its slate of directors had won by a margin of 56% to 41% (with 3% abstaining). Following the proxy contest, there was speculation on what Desert Partners might do next. They had indicated a willingness to increase their bid, but had been rejected by management and had lost the proxy contest. With only one week remaining before Desert Partners’ tender offer expired, shareholders had to decide whether to tender their shares or wait and vote for the proposed restructuring at the special meeting in July 8th.
15 Julie Siler, “USG Claims Victory in Desert Proxy Fight,” The New York Times, May 12, 1988, p. 5. 16 Liz Sly, Chicago Tribune, July 9, 1988, p. 6. 17 USG Corporation, Prospectus, July 7, 1988, p. 16. 18 Anonymous, “USG Rejects Desert Partners Latest Offer,” Reuters Financial Service , May 4, 1988.
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Exhibit 1 Building Industry Statistics
Construction Data Gypsum Industry Data Residential Average
Expenditures New New Price/Ton U.S. on Maintenance Residential Nonresidential U.S. U.S. for Crude
Housing Repairs, and Construction Construction Shipments Capacity Gypsum- Average Starts Improvements Put in Place Put in Place of Gypsum of Gypsum (FOB mine*) Prime
Y e a r (thousands) ($ millions) ($ millions) ($ millions) (billion sq. ft.) (billion sq. ft.) (dollars) Rate
1968 1,507.6 $12,703 $ 3 4 , 1 7 2 $ 2 3 , 8 1 1 9 . 5 5 n / a n / a 6.31%
1969 1,466.8 13,534 37,214 27,741 10.28 n / a n / a 7.96
1970 1,433.6 14,770 35,863 28,171 9.74 n / a n / a 7.91
1971 2,052.2 16,300 48,514 29,307 11.94 n / a n / a 5.72
1972 2,356.6 17,498 60,693 32,375 14.37 n / a n / a 5.25
1973 2,045.3 18,512 65,085 37,639 15.15 n / a $4.18 8.03
1974 1,337.7 21,113 55,967 39,889 12.91 n / a 4.41 10.81
1975 1,160.4 25,239 51,581 35,409 10.74 n / a 4.58 7.86
1976 1,537.5 29,035 68,273 34,628 13.12 n / a 5.00 6.84
1977 1,987.1 31,280 92,004 38,245 15.37 16.50 5.55 6.83
1978 2,020.3 37,461 109,838 48,824 16.41 17.00 6.23 9.06
1979 1,745.1 42,231 116,444 64,765 16.74 17.50 6.83 12.67
1980 1,292.2 46,338 100,381 72,480 14.13 18.25 8.33 15.27
1981 1,084.2 46,351 99,241 85,569 13.76 18.67 8.53 18.87
1982 1,062.2 45,291 84,676 92,690 13.09 19.14 8.46 14.84
1983 1,703.0 49,295 125,521 87,069 16.82 18.50 7.87 10.79
1984 1,749.5 69,784 153,849 107,680 18.32 20.00 7.94 12.04
1985 1,741.8 80,267 158,474 127,466 19.43 20.87 7.76 9.93
1986 1,805.4 91,274 187,148 120,917 20.42 21.63 6.46 8.33
1987 1,620.5 94,082 194,656 123,247 20.63 23.37 6.85 8.21
Sources: U.S. Census; U.S. Bureau of Mines: Mineral Commodity Summaries (1990); and Datastream. *FOB means free on board. It is the price quoted to load a product on board the transporting vehicle, after which the buyer is responsible for all transportation costs.
n/a = not available
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Exhibit 2 USG Corporation Consolidated Statement of Earnings for years ended December 31a ($ thousands except per-share figures)
1987 1986 1985 1984 1983
Net sales $2,898,063 $2,723,664 $2,333,387 $2,318,628 $1,611,071 Cost of products sold 2,114,424 1,884,596 1,641,009 1,712,936 1,264,569
Gross profit $ 783,639 $ 839,068 $ 692,378 $ 605,692 $ 346,502 Expenses and other income: Selling and administration
expenses 344,410 310,874 251,164 239,644 185,581 Restructuring and early
retirement expenses 53,564 – – – – Interest expense 70,257 34,850 27,804 26,475 11,117 Interest income (6,510) (6,949) (9,447) (7,947) (7,392) Gain on offering of
subsidiary stock (43,988) – – – – Other expense (income), net (1,854) 2,534 (3,833) (2,265) 10,152
Earnings from continuing operations before taxes on income $ 367,760 $ 497,759 $ 426,690 $ 349,785 $ 147,044
Taxes on income 163,471 242,329 201,443 163,229 66,721 Earnings from continuing
operations 204,289 255,430 225,247 – – Discounted operations: Operating loss, net of taxes – (3,254) (1,450) – – Loss on divestiture,
net of taxes – (26,668) – – –
Net earnings $ 204,289 $ 225,508 $ 223,797 $ 186,556 $ 80,323 Earnings (Loss) per
common share: Continuing operations $ 3.96 $ 4.01 $ 3.38 $ 2.82 $ 1.19 Discounted operations – (0.47) (0.02) 0.12 0.01
Net $ 3.96 $ 3.54 $ 3.36 $ 2.94 $ 1.20
Average # of common shares outstanding (millions)
51.6 63.6 66.6 66.0 66.9
Closing stock price (12/31) $ 29.13 $ 37.75 $ 25.31 $ 14.85 $ 14.81 Dividends per common share $ 1.12 $ 1.04 $ 0.84 $ 0.70 $ 0.61 Book value per share $ 11.76 $ 11.06 $ 15.08 $ 12.87 $ 10.97
Number of employees 22,200 21,700 20,100 18,000 14,000
Equity Beta b 1.37
Source: USG Corporation Annual Reports
aStatement of earnings has been restated to reflect acquisitions and divestitures. bThe beta was estimated using daily data from August 1987 to May 1988.
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Exhibit 3 USG Corporation Consolidated Balance Sheet (as of December 31) ($ thousands, except per-share figures)
1987 1986
Assets Current assets:
Cash (primarily time deposits) $ 31,251 $ 92,370 Marketable securities, at cost which approximates market value 13,417 8,136 Receivables (net of reserves) 348,686 324,646 Inventories 215,943 194,574 Net assets of discontinued operations – 66,821
Total current assets $ 609,297 $ 686,547 Property, plant and equipment, net 1,190,470 1,104,691 Purchased goodwill 250,121 168,021 Other assets 44,866 46,809
Total assets $2,094,754 $2,006,068
Liabilities and Stockholder’s Equity Current liabilities:
Accounts payable $ 166,063 $ 121,222 Commercial paper and notes payable 39,049 246,688 Accrued expenses:
Payrolls 37,187 35,310 Taxes and other than taxes on income 21,639 14,872 Restructuring 47,799 – Other 118,976 115,070
Long-term debt maturing within one year 39,020 41,496 Taxes on income 18,384 42,395
Total current liabilities $ 488,097 $ 617,053 Long-term debt 745,957 571,199 Deferred income taxes 221,700 216,600 Other obligations $ 29,167 $ 16,601
Stockholder’s Equity: Preferred Stock 68 129 Common Stock 206,530 209,738 Capital received in excess of per value 5,410 – Deferred currency translation (9,077) (23,263) Reinvested earnings 406,902 398,011
Total stockholders’ equity $ 609,833 $ 584,615
Total liabilities and stockholders’ $2,094,754 $2,006,068
Source: USG Corporation Annual Reports
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Exhibit 4 USG Corporation—Industry Segments ($ thousands)
1987 1986 1985 1984
Gypsum Net sales $1,475,908 $1,489,537 $1,380,703 $1,139,212 Operating profit 317,428 453,592 403,761 339,983 Identifiable assets 875,732 816,605 751,568 617,392 Depreciation and depletion 47,394 45,949 42,905 35,892 Capital expenditures 93,475 118,939 90,050 58,910
Interior Systems Net sales 576,860 479,445 212,550 148,115 Operating profit 71,300 67,275 41,325 22,925 Identifiable assets 394,254 357,448 122,795 90,534 Depreciation and depletion 14,286 10,632 4,889 3,375 Capital expenditures 33,634 23,864 24,897 6,069
Wood Fiber Net sales 530,242 497,584 466,169 339,414 Operating profit 51,958 39,854 20,226 13,340 Identifiable assets 456,537 426,019 418,189 424,214 Depreciation and depletion 22,243 19,797 18,251 11,816 Capital expenditures 29,358 33,450 22,105 20,849
Other Products Net sales 315,053 257,093 273,965 247,190 Operating profit 25,965 19,757 21,497 (7,312) Identifiable assets 102,047 159,437 160,861 155,639 Depreciation and depletion 8,662 7,815 6,428 7,427 Capital expenditures 19,147 14,883 11,756 17,877
Source: USG Corporation Annual Reports
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Exhibit 5 USG Corporation Stock Price versus S&P Indices: January 1983 to May 1988
$0
$10
$20
$30
$40
$50
$60
Jan-83 Jul-83 Jan-84 Jul-84 Jan-85 Jul-85 Jan-86 Jul-86 Jan-87 Jul-87 Jan-88
USG Corp. S&P 500 Index S&P Building Products Index
Robert Day becomes CEO
Belzberg’s begin buying stock Desert Partners
offers $42/share
Desert Partners announces 9.8% stake
USG announces proposed recap
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Exhibit 6a Sources and Uses of Funds for USG Corporation’s Proposed Recapitalization
(In Millions)
Uses of Funds
Cash payments to holders of outstanding commons shares $1,924.0 Junior debentures 259.8 Repayment of existing short-term and long-term debt 177.7 Cancellation of stock options 17.0 Estimated fees and expenses 71.2 Cash (increase firm’s cash balances) 10.1
Total uses $2,459.8
Sources of Funds
Term loans (bank debt) $1,600.0 Senior subordinated debentures 600.0 Junior debentures 259.8
Total sources $2,459.8
Source: USG Corporation, Prospectus dated July 7, 1988.
Exhibit 6b Schedule of Term Loan Repayments
Year Annual Amortization
(millions)
1988 $ 100 1989 600 1990 165 1991 60 1992 155 1993 150 1994 125 1995 155 1996 90
Total $1,600
Source: USG Corporation, Prospectus dated July 7, 1988.
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Exhibit 7 Projected Financial Data (in millions)
Years Ended December 31 At
Closing 1988 1989 1990 1991 1992
EARNINGS STATEMENT DATA: Net sales $2,098 $2,179 $2,335 $2,433 $2,548
Earnings before interest expense and taxes $ 312 $ 405 $ 479 $ 507 $ 545 Interest expense, neta (196) (282) (276) (265) (260) Earnings before taxes 116 123 203 242 285 Taxes on incomeb (49) (53) (84) (100) (116) Minority interest, net of tax (9) (8) (8) (9) (9) Gain on asset sales, net of taxc 56 – – – – Net income from divested operationsd 22 – – – –
Net earnings $ 136 $ 62 $ 111 $ 133 $ 160
CASH FLOW DATA: Net earnings from continuing operations $ 80 $ 62 $ 111 $ 133 $ 160 Depreciation and amortization 84 79 74 71 72 Deferred taxes and other 25 19 23 14 17 Cash provided by continuing operations 189 160 208 218 249 Capital expenditures (104) (68) (58) (89) (121) Proceeds from asset sales, net of tax 519 14 1 1 1 Junior debenture interest expensee 22 47 55 64 74 Unrepatriated cash of foreign subsidiaries (21) (18) (20) (22) (22) Other changesf 29 (5) (11) (6) (21) Cash available to service principal
repayments $ 634 $ 130 $ 175 $ 166 $ 160
BALANCE SHEET DATA: Net assets $ 995 $ 975 $ 967 $1,000 $1,075 Total debt:g
Senior bank debt $1,600 $1,014 $890 $724 $666 $513 Existing debt 674 608 602 593 485 478 Senior subordinated debentures 600 550 550 550 550 550 Junior debenturese 260 281 328 383 447 521
Total long-term debt $3,134 $2,453 $2,370 $2,250 $2,148 $2,062
Stockholders’ equity (deficit) ($1,567) ($1,458) ($1,395) ($1,283) ($1,148) $ (987)
Source: USG Corporation, Prospectus dated July 7, 1988.
aNet of interest income. The average interest rates on the Credit Facility, Senior Subordinated Debentures, Junior Debentures, and existing debt retained are assumed to be 10.50%, 14.00%, 16.00%, and 8.25%.
bAssuming a statutory U.S. Federal income tax rate of 34%, a state income tax rate of 6.5%, and a Canadian income tax rate of 42%.
cManagement estimates a net after-tax gain on businesses and asset sales of approximately $56m in 1988. dNet income from divested operations reflects the contribution to net earnings by exited businesses until the point of divestiture.
eReflects the issuance of additional Junior Debentures resulting from pay-in-kind (non-cash) interest incurred on previously issued Junior Debentures.
fOther charges includes primarily changes in net working capital. gIncludes the currently maturing portion of long-term debt in each year.
297-052 USG Corporation
14
Exhibit 8a Recent Acquisition Announcements in the Building Products Industry
Acquirer Target Announcement
Date
Target Sales
(millions)
Offer Price to Book Value
Offer Price to Earnings per Share
Saint-Gobain Wolverine Aluminum 4/11/88 $ 111 2.9 13.2 Saint-Gobain Certainteed Corp. 2/26/88 $1,160 1.8 12.8 Southdown Inc. Moore McCormack 2/23/88 $ 334 1.2 13.4 Florida Rock Arundel Corp. 11/24/87 $ 82 1.9 11.6 Kohlberg, Kravis Jim Walter Corp. 7/17/87 $1,720 1.4 12.8 Weyerhauser Timberland Ind. 7/9/87 $ 52 1.4 12.7
Source: Grimm’s Mergerstat Review, M&A Sourcebook, casewriter estimates. Note: Sales are for the latest four quarters; earnings per share are estimates for the current year; and book values are from the last quarter before the announcement.
Exhibit 8b Trading Multiples for Building Products Companies as of March 31, 1988
Company Stock Price
Sales (millions)
Debt to Total Capital
Ratio
Market Price to Book Value
Market Price to Earnings per Share
USG Corporation $38.13 $2,920 57% 3.1 12.4
Ameron International $31.63 $ 316 19% 1.0 12.2 Armstrong World Ind. $34.25 $2,453 17% 1.8 10.2 Butler Manufacturing $32.50 $ 635 22% 1.3 15.7 Florida Rock Industries $27.63 $ 323 43% 2.0 13.1 Masco Corp. $26.38 $2,282 41% 2.5 11.6 Ply-Gem Industries $13.88 $ 332 45% 1.7 11.6 Southdown, Inc. $41.50 $ 339 48% 1.4 10.4
Source: Compustat Note: Sales and earnings per share are for the latest four quarter. Debt to total capital ratios and book values are from March 31, 1988.
USG Corporation 297-052
15
Exhibit 9 Selected Financial Market Data
June 24, 1988
Yields on U.S. Treasury Bills, Notes, and Bonds 1 month 6.50% 6 month 6.78 1 – year 7.53 2 – year 8.08 5 – year 8.52 10 – year 8.94 30 – year 8.98
Yields on Long-term Corporate Bonds Aaa 9.79% Aa 10.08 A 10.37 Baa 10.97
Interest Rates 3 month LIBOR 7.88% 6 month LIBOR 8.00 3 month CD 7.55 Prime Rate 9.00
Source: Federal Reserve Bulletin
