Business

Berkshire Bets on U.S. With a Railroad Purchase

November 3, 2009, 7:37 am
Warren Buffett

Update | 11:06 a.m. Berkshire Hathaway, the investment vehicle of Warren E. Buffett, said on Tuesday that it planned to buy the 77.4 percent of Burlington Northern Santa Fe it did not already own for $26 billion in cash and stock, in the largest deal in Berkshire history.

The deal, which including Berkshire’s previous investment and the assumption of $10 billion in Burlington Northern debt brings the total value to $44 billion, represents what Mr. Buffett said was a big bet on the United States. He told CNBC in an interview that railroad operators cannot do well unless American businesses were producing goods and customers were buying them.

“It’s an all-in wager on the economic future of the United States,” he said in a written statement. “I love these bets.”

Burlington Northern stock price

In the interview with CNBC, Mr. Buffett said that the deal came together quickly. He made a proposal to Matthew K. Rose, Burlington Northern’s chairman and chief executive. Mr. Rose took the proposal to his board — and got an answer in about 15 minutes.

“We are thrilled to have the opportunity to become a part of the Berkshire Hathaway family,” Mr. Rose said in a statement. “We admire Warren’s leadership philosophy supporting long-term investment that will allow BNSF to focus on future needs of our railroad, our customers and the U.S. transportation infrastructure.”

During the financial crisis of last year, Mr. Buffett spent $14.5 billion to buy preferred shares of three blue-chip American companies, Wrigley, General Electric and Goldman Sachs. These companies didn’t get Mr. Buffett’s seal of approval for free, however; the preferred stock carries hefty dividend payments.

Burlington Northern was created in June of 1994 with the merger of Burlington Northern Inc. and the Santa Fe Pacific Corporation in a stock swap valued at $2.7 billion. The merger was seen as complementary, giving it access to the coal fields of the West as well as West Coasts ports and Mexico and Canada. Santa Fe specialized in intermodal services, which involves moving goods by rail to be delivered locally by truck. Burlington Northern carried heavy commodities like coal, grain and timber.

Under the terms of Tuesday’s deal, Berkshire will pay about $100 for each Burlington Northern share, a price comprised of about 60 percent in cash and 40 percent in stock. Berkshire deals historically have almost never used stock, but Mr. Buffett told CNBC that Burlington Northern wanted a tax-free component for its shareholders.

Shares in Burlington Northern, which closed Monday at $76.07, jumped nearly 30 percent in premarket trading on Tuesday to $98.15. Class A shares in Berkshire were up slightly in premarket trading at $98,971.57.

As part of the deal, Berkshire will split its class B shares 50-to-1 to help pay for the acquisition. It is an unusual move for Mr. Buffett, who has long said he did not like stock splits. Most of the stock component in the deal, however, will be in Berkshire class A shares.

Of the $16 billion in cash for the deal, Berkshire plans to use $8 billion on its books and $8 billion borrowed from banks, which will be repaid in three annual installments. After the deal, Berkshire will have $20 billion in cash on hand.

“I like cash,” Mr. Buffett said.

The Burlington deal is the largest for Mr. Buffett since he agreed nearly two years ago to acquire control of Marmon Holdings, the industrial holding company of the Pritzker family, for an initial price of $4.5 billion.

Burlington Northern was advised by Goldman Sachs, Evercore Partners and the law firm Cravath Swaine & Moore. Berkshire was advised by the law firm Munger, Tolles & Olson.

Go to Berkshire Hathaway Press Release via Business Wire »


From 1 to 25 of 102 Comments

1 2 3 ... 5
  1. 1. November 3, 2009 8:04 am Link

    This is good news for anybody who loves rail travel.

    — robert proulx
  2. 2. November 3, 2009 8:12 am Link

    Too big to fail?

    — John
  3. 3. November 3, 2009 8:26 am Link

    Old money has owned the rails forever. There is no advantage to owning the rails than any other position, but Warren represents bond holders who have been squeezed and the assumption of debt is a tell. There is little doubt that his reputation has been soured by the recession.

    — KraftPaper
  4. 4. November 3, 2009 8:28 am Link

    Interesting: 1) Burlington Northern approved the deal in 15 minutes, 2) Berkshire will split its stock to help finance the deal, & 3) Berkshire borrowed $8B to help finance the deal. Hope your “bet” is on the money, Mr. Buffett.

    — Rob
  5. 5. November 3, 2009 8:38 am Link

    robert proulx said: “This is good news for anybody who loves rail travel.”

    How so? Burlington hauls freight, not people.

    — Graxczyl
  6. 6. November 3, 2009 8:39 am Link

    Better than a planned (and already underway) Canadian rail corporation (CN Railway) who already has a hold on the rail system in Illinois down to Tennessee (and plans to Mexico). It would be a NAFTA rail system bypassing America.

    — Judy
  7. 7. November 3, 2009 8:47 am Link

    Graxczyl said: “How so? Burlington hauls freight, not people”

    Graxczyl has obviously never seen a Charlie Chaplin movie :)

    — DR
  8. 8. November 3, 2009 8:48 am Link

    I hope when Obama is out of office in 2013, that the new Independent President will stop this man from seeing green. This guy is dangerous.

    — nbk7ak2
  9. 9. November 3, 2009 8:53 am Link

    Given Mr. Buffett’s savvy in business, this may well be a good sign of a turn-around with respect to America’s senile / febrile rail system. Notwithstanding that BNSF carries freight, not people, any investment in tthe rail system and its infrastructure (assumed / hopefully) cannot help but spur the long-needed redirection of America’s attitude toward transportation

    — LM
  10. 10. November 3, 2009 8:58 am Link

    To Graxczyl above. The freight railroads own the track that the commuter lines, including Amtrak, run on. They use their capital expenditures in maintaining and upgrading the track. This kind of investment by a true American patriot can only benefit everybody. Let’s support American businesses that produce or expedite tangible products. American railroads encourage local business development, encourage innovation and technological change and most importantly, realize that their union employees are the backbone of their service to the customer. Despite disagreements with unions over company handling of agreements and dangerous working conditions in some practices (as in remote control operations and crew reductions in local operations) these railroads want to do right by their employees. And that is a change that most other “American Corporations” could well imitate.

    — Robert LoCicero
  11. 11. November 3, 2009 8:58 am Link

    B&N and SFTA still have lots of remnant real estate - worth billions. Look for more Dairy Queens at choice locations.

    — Fla Joe
  12. 12. November 3, 2009 9:12 am Link

    Buff dog probably knows about govt rail plans that you don’t, when the kids from GS call you poppa then u gotta be pretty legit

    — Poor man
  13. 13. November 3, 2009 9:17 am Link

    I can’t help but notice the timing on this. The Association for the Study of Peak Oil has just been meeting in Denver.

    — Indiana Dale
  14. 14. November 3, 2009 9:19 am Link

    May be this is one of those perfect opporunities when government will pour money in to railroad infrastructure as people seems to get frustrated by air travel with so much crap. In all its glory, Warren will rip the fruits.

    — Bond
  15. 15. November 3, 2009 9:20 am Link

    Choo-Choo…Chuga-Chuga-Chuga-Chuga…Choo-Choo
    Now hopefully Obama gets voted out next election and Warren’s “big bet on the United States” can come true.

    — Rob Davis
  16. 16. November 3, 2009 9:20 am Link

    Think it’ is an interesting bet on future of trade / logistics / infrastructure / coal-energy (supports his utilities) …
    Love this strategy… Solid 21st century bet on 19th century iconic mode of transportation… but the real value will be in the logistics and corridors (rail or no rail- it’s land/access).

    — Garry G
  17. 17. November 3, 2009 9:24 am Link

    when buffett dies berk shareholders will awaken from their stupor and say get me out and the stock will be worth 1/3 of licquidation value its jimmy ling-harold geneeh-jerry tsai redux

    — erine
  18. 18. November 3, 2009 9:24 am Link

    BNSF makes a large fraction of its profit by hauling coal, and coal will be essentially illegal in about 20 years. It will be interesting to see how Buffett and his successors replace that revenue stream.

    — richard schumacher
  19. 19. November 3, 2009 9:25 am Link

    gas prices are on a permanent uphill climb due to increasing world demand, dwindling/ more difficult to get to sources

    this is a shrewd bet that freight will migrate back to rail, away from trucks, as a cost saving measure in the future years and decades

    rail is poised to make a big come back. it will be very gradual, but it is inevitable

    — br
  20. 20. November 3, 2009 9:35 am Link

    Maybe this will turn into a revolutionary experiment in green technology for x-country transportation?

    — jendive
  21. 21. November 3, 2009 9:36 am Link

    Buffett keeps talking up the American economy but people should realize he judges investments over a time span of decades not months or even years. This investment will be looking good 10 years down the road, but with unemployment increasing in this country and nothing really being done about it we are looking at 2016 or later for the economy to make it back all the jobs it lost in this recession. This recession is unprecedented in the modern age. Railroads will sputter along until job growth comes back and manufacturing isn’t going to be where it was 2005-2007 for many many years (meaning traffic at railroads will be depressed for many many years).

    This also might be Buffett’s bet that railroad transportation is going to get more important in the future as oil prices climb giving it a bit of an advantage over the airlines and the trucking industry.

    — Brett
  22. 22. November 3, 2009 9:48 am Link

    Interesting that the Sage Of Omaha did not go after the Omaha-based Union Pacific.

    — John
  23. 23. November 3, 2009 9:52 am Link

    Fla Joe is correct in noting that BNSF - like most all RRs - have huge real estate holdings acquired over their histories. Some, like the Penn Central, fled railroading to become real estate and investment companies. Many others, mostly the western lines, still have large RE holdings that include timber & mineral land which compliment their rail operations. But as small frontier towns became large western cities, the value of their real property has greatly benefiteed railroads.
    Still, there were once hundreds of railroad companies in the country, and now there are only 4 Class 1s, and those that have survived are all Coal Roads. Certainly hauling imported high-value merchandise is now increasingly important, but coal traffic must inevitably diminish, and something of higher value has to replace it.

    Also - Does anyone know if Buffett is sympathetic to passenger rail service?

    — Peter
  24. 24. November 3, 2009 9:54 am Link

    This country relies too much fuel inefficient trucks for interstate shipping, so this is a good move. Especially as the economy improves which will trigger higher energy prices.

    Hopefully, Mr Buffett will eventually buy an eastern based railroad so we will finally have a totally integrated coast to coast railroad network

    — kj
  25. 25. November 3, 2009 9:59 am Link

    I LOVE Dairy Queen!

    — JB
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