WORLD> America
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WORLD> America
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Buffett buying Burlington rail for $26B
(Agencies)
Updated: 2009-11-04 06:32 NEW YORK: Warren Buffett's Berkshire Hathaway Inc will pay $26 billion to buy out Burlington Northern Santa Fe Corp in a bet that the nation's largest rail company is poised to benefit from a recovering US economy. The deal announced Tuesday, Buffett's biggest-ever acquisition, also represents a bet on coal and new interest in a storied but highly cyclical American industry that has tried to reinvent itself by emphasizing its ability to move goods cheaply and efficiently.
"It's an all-in wager on the economic future of the United States," Buffett, who has been building up his rail holdings for several years, said in a statement. "I love these bets." Reversing his long-time opposition to share splits, which has resulted in Berkshire having the highest per-share prices of any shares on the New York Stock Exchange, Buffett agreed to a 50-for-1 split of Class B stock, which will make it much more accessible to retail investors. The Class B shares trade at over $3,000, and the Class A shares at more than $100,000. The B shares were up about 2 percent and the A shares about 1.5 percent. Buffett, one of the world's richest men and one of its most revered investors, is known for making big long-term bets. In October 2008, soon after the collapse of Lehman Brothers set off worldwide selling, he wrote in The New York Times: "Fears regarding the long-term prosperity of the nation's many sound companies make no sense."
Berkshire could not do an all-stock deal because it would deplete its capital beyond what insurance regulators would allow, said Justin Fuller, an analyst at Midway Capital Research & Management in Chicago and author of the Buffettologist.com blog. Berkshire's biggest holdings include insurers like Geico, although it has close to 80 units with products ranging from carpeting to natural gas, ice cream, paint and underwear. "They tend to accumulate capital faster than they know what to do with it, and this is a really good deal for them," Fuller said. "It will create a lot of value for Berkshire." RECOVERING ECONOMY The deal, expected to close in the first quarter of 2010, comes as the US economy is beginning to recover from its worst downturn since World War Two. US gross domestic product grew at a 3.5 percent annual rate in the third quarter, the first quarterly growth in more than a year. BNSF, the No. 1 US railroad by revenue, operates in the US West and Midwest. It said in September that freight volumes were recovering and it was encouraged by an improvement in consumer-related markets. [ID:nN08286978] "Berkshire is seeing way past some impending economic recovery signs now and looking into the future," said Peter Boockvar, equity strategist at Miller Tabak + Co in New York. US railroads have invested in technology and improved the efficiency of operations, while arguing that their method of transport is cheaper and cleaner than shipping goods by truck. The deal came together quickly. "I made (BNSF Chief Executive Officer Matt Rose) an offer and he said he would take it to his board and it took about 15 minutes," Buffett told CNBC television. He added: "We won't be making any huge deals for a while." With Berkshire's support, BNSF would be able to invest in its infrastructure and not have to worry about meeting quarterly expectations, said Thomas Russo, a partner with Gardner Russo & Gardner in Lancaster, Pennsylvania, which counts Berkshire as its second-largest holding. RAILS RALLY BNSF, with its Western presence, is a key shipper of Asian goods into the US interior and the leading shipper of coal and agricultural commodities, according to Robert W. Baird. About a third of BNSF's revenue comes from intermodal freight -- containers that can be moved from ship to rail or truck -- with 23 percent from coal, and 19 percent from farm goods. The deal makes Fort Worth, Texas-based BNSF the top US railroad by market capitalization. By comparison, Union Pacific Corp has a market cap of about $28 billion, while Norfolk Southern Corp and CSX Corp are each worth about $17 billion, according to Thomson Reuters data. BNSF's 2008 revenue of $18 billion was about $1 billion ahead of that of its nearest rival, Union Pacific. For an analysis of the deal's implications, see BNSF shares were up 28.4 percent at $97.68 in afternoon trading on the New York Stock Exchange. Union Pacific gained 7.2 percent, Norfolk Southern 5.4 percent and CSX 6.8 percent. The Dow Transports index, which includes all these stocks and is a proxy for US economic activity, gained 5.2 percent to 3765.62. It is up 75 percent from March lows, beating the Standard & Poor's 500 index. Canadian National Railway rose 71 cents to C$53.28, and Canadian Pacific rose C$1.42 to C$48.64. Berkshire held a 1.9 percent stake in Union Pacific and a 0.5 percent stake in Norfolk Southern, according to Thomson Reuters data. The small size of those holdings was unlikely to attract regulatory scrutiny, said Bob Szabo, executive director of Consumers United for Rail Equity. Buffett said he is not interested in buying Union Pacific. Los Angeles-based money manager Capital Group Cos, which oversees the $780 billion American Funds mutual fund family, would be one of the big winners in the deal. Its fund unit held 32.2 million BNSF shares, a 9.5 percent stake, making it the largest shareholder after Buffett, according to Thomson Reuters data. BETTING ON COAL Analysts said the deal did not necessarily signal a wave of mergers and acquisitions in railroads. "As far as seeing railroad themselves merging, I wouldn't expect that right away," said George Van Horn, senior analyst with market research firm IBISWorld. The deal really marks a bet on the future of coal, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Buffett is trying to get into coal but doing it in a cheaper way," Ablin said. Berkshire said the 50-for-1 split of its Class B shares, subject to shareholder approval, would make it easier for small BNSF shareholders to swap their shares for Berkshire stock. Goldman, Sachs & Co and Evercore Partners Inc acted as financial advisers to BNSF, and the company's legal counsel is Cravath Swaine & Moore LLP. Berkshire's transaction counsel is Munger, Tolles & Olson LLP. |
