UPDATE 2-USG rejects buyout offer from Germany's Knauf

(Adds USG's comment)

March 26 (Reuters) - U.S. building products maker USG Corp on Monday rejected an unsolicited buyout offer from its Germany-based second biggest shareholder, Gebr Knauf KG, saying that the offer substantially undervalued the company.

Gebr Knauf, which already owns a 10.5 percent stake in the company, has offered $42 per share for the remaining stake, a premium of 25 percent to the stock's Friday closing, valuing the company at about $6 billion.

The stock was trading at $39.90 before the bell.

"Knauf's opportunistically timed proposal is wholly inadequate," USG Non-Executive Chairman of the board Steven Leer said.

Warren Buffet's Berkshire Hathaway Inc, which has a stake of about 31 percent in USG, has offered a six-month option to sell all its shares in the company to Knauf as long as its offer for USG is for $42 per share or more. Berkshire is asking for an option purchase price of $2 per share.

The option provides a sweetener for Buffett to shed a profitable investment that originated in late 2008, at the height of the housing crisis, when Berkshire and Canadas Fairfax Financial Holdings Ltd bought $400 million of USGs debt.

The $2 per share cost of the option would provide Berkshire about $86.8 million upfront, based on its 43.39 million share USG stake.

Berkshire would keep that money if Knauf proved unable to buy USG. (Reporting by Arunima Banerjee and Ankit Ajmera in Bengaluru; Editing by Anil D'Silva)