Buffett to spend $26 billion for remainder of Burlington Northern

DALLAS, Nov 03, 2009 (The Dallas Morning News - McClatchy-Tribune News Service via COMTEX) -- BRK/A | Quote | Chart | News | PowerRating -- Warren Buffett bought an expensive train set Tuesday, betting $26 billion for Burlington Northern Santa Fe railroad on the hunch that a recovering economy will re-stoke the nation's appetite for coal and Chinese imports.

Buffett's holding company, Berkshire Hathaway, agreed to pay $100 a share in cash and stock for the 77 percent of BNSF stock it didn't already own.

The price values what many analysts call the nation's largest railroad by revenue at $34 billion. Add $10 billion in assumed debt, and the $44 billion total price tag makes BNSF Buffett's biggest buy ever.

If the deal closes as planned early next year, it would give Berkshire 32,000 miles of track across 28 states, largely between the Mississippi River and the Pacific Ocean. BNSF competes in the western U.S. with Union Pacific Corp., which is based in Buffett's hometown of Omaha, Neb.

BNSF rails connect key West Coast container ports, such as Long Beach, Calif., to inland distribution hubs, such as the one adjacent Fort Worth's Alliance Airport. That's a network primed to pump Asian wares to American consumers when the global economy rights itself.

The railroad also has strong access to the low-sulfur coal of the Powder River Basin in Wyoming and Montana. Powder River Basic coal, hauled around the country in lengthy unit trains, heated railroad profits during the last energy spike.

BNSF's strengths in moving coal, farm goods and shipping containers that can go from ships to trains to trucks help justify the offer's 31 percent premium on the Monday close of BNSF shares of $76.07, analysts said.

"This is a coal and Asian trade route deal," said Jason Seidl, a transportation analyst for Dahlman Rose & Co. in New York. "The short run for both of those is bad, but as a longer-term play it makes sense."

The deal struck with lightning speed, said BNSF head Matthew Rose and Buffett in television interviews.

"I said, 'Matt, if you're ever looking for a home for the railroad, Berkshire would make a good one,' " Buffett told Fox Business News on Tuesday. "He didn't throw me out of the office, so the next day I made him an offer."

On Oct. 23, Buffett pitched Rose on a sale at the historic Ashton Hotel in Fort Worth, Texas, and the two quickly reached a handshake agreement. Meeting in Detroit on Monday night, the BNSF board took just 15 minutes to approve what Buffett said was his sole offer, Rose told Bloomberg.

Buffett admitted to not knowing much about railroads, but Berkshire has a history of buying good companies with good management teams and keeping them intact. "Their management team is one of the most respected in the industry," Seidl said, referring to BNSF.

The company's headquarters will remain in Fort Worth.

Buffett's empire stretches from insurance to energy to jewelry. Berkshire's subsidiaries include underwear maker Fruit of the Loom, car insurer Geico and restaurant chain Dairy Queen.

Other holdings include Acme Brick, boot maker Justin Brands, and electronic components distributor TTI.

Buffett-watchers stopped short of saying Buffett overpaid for a stock whose all-time high is $114 _ just $14 less than his offer. But BNSF didn't come cheap.

"This is very atypical," said Alice Schroeder, a Buffett biographer and Bloomberg News columnist. "I was not surprised by the deal, but I was very surprised by the price. Compared to the normal terms that he gets on deal, this is an expensive valuation."

BNSF stands out, analysts said, because it generates more cash from its operations _ "well over $1 billion this year" Seidl said _ than its peers and may outperform them as the recovery gains traction.

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As diesel fuel costs rise, railroads feel only a quarter of the impact that trucking companies see in their costs because locomotives are substantially more fuel efficient in per ton of freight moved, analysts say.

Congestion on the nation's rails three years ago that damped profits for railroads has largely been addressed through better port facilities and improved routing, Seidl said, setting the stage for railroads to prosper.

The big premium for BNSF may serve as the capstone for a "railroad renaissance" that saw major rail carriers invest billions in improved track, rail yards and infrastructure, said Anthony Hatch, an independent railroad analyst in New York.

"It will grow faster than the economy over the next cycle, in my opinion," he said Tuesday. "This company is going to do well through the next cycle and beyond because it's becoming more important to how the West sources and moves its goods, and how the East connects to Asia."

Railroads have been able to sustain price increases even during the slowdown, and that pricing power could fuel much higher earnings as the economy picks up speed.

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Investors sent BNSF shares up $20.93 to $97 Tuesday; shares of Berkshire Class A shares rose $1,700 to $100,450.

Buffett already has a considerable Lionel model train collection, Rose said in his Fox Business News interview, and now has 6,000 full-size locomotives and 215,000 rail cars to round it out. Buffett, whose buy-and-hold investment strategies have become a gold standard for investors large and small, said he's buying into an underappreciated business.

"The deregulation that took place starting in 1980 has actually benefited the shippers enormously and we're moving far, far more freight with using far less fuel, very efficiently," Buffett said. "My guess is that people will see the rail for what they are _ really an outstanding way of moving freight around the country."

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