USG Corporation (NYSE: USG) shares are surging this morning.  The sheet rock and building products company has reported that it has entered into an agreement to sell a total of $400 million of 10 percent contingent convertible senior notes due 2018.  What is more important is who it is selling too: Berkshire Hathaway, Inc. (NYSE: BRK-A) and Fairfax Financial Holdings Limited (NYSE: FFH).

In the deal, it looks like $300 million are being sold to WarrenBuffett’s Berkshire and $100 million to Fairfax FinancialHoldings Limited.  This is not a new investment for Buffett.  BerkshireHathaway already holds the largest independent share of this stock.

• Full Buffett Holdings

The notes will bare a rate of 10% initially. USG will also seekshareholder approval to allow conversion of the notes into shares ofUSG common stock and if approved these will come at a conversion priceof $11.40 per share.

Here is where this deal gets interesting.  If shareholder approval isnot obtained prior to the 135th day after closing of the sale of thenotes, the notes will come to 20% per year until after shareholderapproval is obtained.

This shareholder approval should be easy to get considering thatBerkshire owns a significant chunk of it already.  Berkshire Hathawayand Fairfax have agreed to vote all shares in favor of the proposal topermit conversion of the notes.

This is really bolstering the value of the stock this morning at USG.  Shares closed yesterday at $5.66, making Buffett’s stake worth only around $100 million.  Considering that this stock has sold off 90%, that is a substantial blow without this new investment.  Shares are trading up 37% at $7.66 this morning before the open.

Jon C. Ogg
November 21, 2008

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