Why is USG a takeover target? Has Robert Day done a good job managing USG since

Question

Why is USG a takeover target? Has Robert Day done a good job managing USG since becoming CEO in June 1985? 2. How should Day respond to Desert Partner’s tender offer? Is the proposed recapitalization the best response? Is USG Corporation a good candidate for a leveraged recapitalization? 3. As a shareholder, would you tender your shares to Desert Partners for $42 per share or wait and vote for the proposed recapitalization? What is the value per share of the leveraged recapitalization including the stub value? Use the Capital Cash Flow Method of DCF valuation and the Method of Multiples. Assume (i) debt beta of 0.10, (ii) market risk premium of 7.5%, (iii) terminal growth rate of 5.0%, (iv) book value of debt approximately equal to its market value, (v) average stock price of $35.0 over the pre-recap estimation period. 4. What are the specific issues that make this valuation complicated? Is your valuation by discounted cash flow consistent with your valuation by multiples? Why or why not? 5. As Desert Partners, how would you respond to the proposed recapitalization plan? Would you increase or reiterate your $42 per share offer? Would you extend the expiration date?

Explanation / Answer

1. USG has been a takeover target because of its strong market share, low levels of operating cost, led in technology, design and innovation, geographic coverage, constant cash flows.It is also thought to be undervalued by many analyst.

2 Day should reject the offer and to implement the leveraged capitalisation.

The proposed recapitalisation would burden the company with debts forcing it to sell profitable units.USG will go from a company that is probably debt free to a company which is overburdened by leverage.This decision will saddle the company with more than $3 billion in debt and high interest payments.

No,USG is a not good candidate for the leveraged recapitalisation.

3 Since the business is a going concern therefore the valution of business should include cash flows till infinity.Additionaly the cash flows are discounted using the cost equity.Based on the calculations performed the adjusted present value of USG equity capital has been arrived at $4546 million.On the other hand USG's valuation has also been calculated using multiplier approach and for this purpose price to earning multiplier has been used.The price to earning multiplier gives the value of $32.38 per share.

Hence the valuation through discounted cash flows is not consistent with the valuation through mulplier.The reason is that the discounted cash flows uses the future cash flows over the life of the project whereas the multiplier valuation uses only one year results.

The leveraged recapitalisation plan would not be suitable option because it will lead to high gearing and the USG is already highly geared and raising more finance would mean that the organisations survival is been put at stake.Therefore it is recommended to increase $42 per share offer.

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