USG Sues Hostile Suitor’s Financial Adviser

CHICAGO —  USG Corp. announced Tuesday that it has sued broker Merrill Lynch & Co., charging it with illegal use of confidential information in providing advice to USG’s hostile bidder Desert Partners LP.

Earlier, USG’s shares jumped sharply in reaction to a recapitalization plan USG announced late Monday as it stepped up efforts to elude a takeover by Desert Partners.

Shares of USG finished up $3.125 at $44.625 on the New York Stock Exchange on Tuesday, indicating Wall Street’s approval of the defensive plan.

Battling on another front, USG filed the lawsuit in U.S. District Court in Chicago seeking damages for misuse of information that it alleges Merrill Lynch obtained when it advised USG on the acquisition of two units, Masonite and DAP.

The suit requests that any profits Merrill Lynch receives from advising Desert Partners be placed in a trust. To date, Desert Partners has paid Merrill Lynch a $1-million retainer fee, a $2-million commitment fee and promises $4 million if it succeeds in taking over USG, formerly U.S. Gypsum Corp.

Merrill Lynch also is an equity partner in the Desert Partners takeover effort.

Fred Yager, a spokesman for the brokerage house, said, “We have reviewed the situation, and Merrill Lynch believes no conflict of interest exists in its involvement with Desert Partners.” He added Merrill Lynch has not yet seen the suit.

In a handful of recent takeover battles, including Beazer PLC’s at Pittsburgh-based Koppers Corp., the targeted company has turned on opposing companies’ financial advisers. Koppers, for instance, publicly attacked investment bank Shearson Lehman Hutton, calling it a symbol of greed on Wall Street.

Confidential Information

Desert Partners, led by Texas oilmen Cyril Wagner and Jack Brown, is offering shareholders $42 a share for 76% of USG’s common stock, or $45 a share if the USG management agrees to a friendly merger.

USG rejected the unsolicited bid and on Monday announced a $2.2-billion recapitalization and restructuring plan that would pay shareholders at least $42 a share in cash and securities plus common stock in a recapitalized company.

Wall Street analysts said they generally expect USG shareholders to favor the recapitalization plan.

“We value USG’s proposal at about $47 a share and we think shareholders are likely to support that,” said Tom Hurckes at DLJ Securities.

According to USG’s suit, Merrill Lynch “obtained confidential, valuable and proprietary information about USG’s long-term business prospects” when it advised USG seven months ago on the DAP buyout, for which it earned $511,058.

A USG spokeswoman said Desert Partners also is named as a co-defendant in the suit.