Buffett makes $34 billion bet on railroad

Nov 04, 2009 (The Kansas City Star - McClatchy-Tribune Information Services via COMTEX) -- BRK/A | Quote | Chart | News | PowerRating -- Warren Buffett leads a simple life. But when the revered business legend buys a train set, it's a $34 billion mega-deal.

Coming along just as the economy has begun to recover, Buffett's bid on Tuesday to buy the Burlington Northern Santa Fe Corp. amounts to an "all-in wager on the economic future of the United States," the CEO of Berkshire Hathaway Inc. said in an announcement.

"I love these bets."

One of the world's richest men, Buffett increasingly has been sharing his affections for American investments, including a personal essay in The New York Times about a year ago.

He heralded a $5 billion investment in financial giant Goldman Sachs Group amid the financial crisis last fall, and he trumpeted a $3 billion buy into General Electric Co. barely a week after that.

The key difference with Tuesday's announcement is that Buffett is buying BNSF outright, in what would be the biggest deal in Berkshire's history. Before this, Berkshire's biggest acquisition was the $16 billion stock purchase of reinsurance giant General Re in 1998.

Omaha, Neb.-based Berkshire will shell out $34 billion in cash and Berkshire shares to acquire the 77.4 percent of BNSF it doesn't already own. That values the company at $100 a share.

After the move by Buffett, shares of BNSF jumped $20.93, or 27.5 percent, to $97.

In addition, Berkshire will assume $10 billion in BNSF debt.

The deal would broaden Berkshire's deep Kansas City footprint, which includes ownership of Helzberg's Diamond Shops Inc. and the parent firm of Reece & Nichols Realtors. It was for seven years a major investor in H&R Block Inc., selling its last shares in 2007.

BNSF, based in Fort Worth, Texas, is the nation's second-largest railroad after Union Pacific, which coincidentally is based in Omaha.

BNSF operates two rail yards in the area and employs more than 2,300. Union Pacific has about 1,100 workers in the area.

Kansas City's economy could feel a direct boost from the deal if it helps prod the railroad's plans to build a major rail-truck freight hub near Gardner and Edgerton, Kan.

"This couldn't be better news for Kansas City," said Chris Kuehl, managing director of Armada Corporate Intelligence in Kansas City. "You get Buffett money behind the company, which creates investor confidence. Plus, he leaves the railroad guys alone to run the business. This ought to be a real green light for Burlington Northern projects like the one near Gardner."

Buffett analyzed his own decision Tuesday as equal parts economic forecast and business play.

"Our country's future prosperity depends on its having an efficient and well-maintained rail system," Buffett said in the announcement. "Conversely, America must grow and prosper for railroads to do well."

Buffett has said he realized a few years late that railroads were an appealing investment. As diesel prices rise, shipping by rail instead of truck becomes more attractive, and it would be extremely difficult for a competitor to build a new railroad.

"They do it in a cost-effective way and extraordinarily environmentally friendly way," Buffett told CNBC. "I basically believe this country will prosper and you'll have more people moving more goods 10 and 20 and 30 years from now, and the rails should benefit. It's a bet on the country, basically."

By buying the rest of BNSF, Buffett has upped the ante if he has miscalculated.

For example, the deal might not be as rewarding if rail freight rates, which were regulated some 20 years ago, fall back under government oversight amid the re-regulatory fervor in Washington, said business professor Mark Hirschey at the University of Kansas. The rail industry has consolidated into a few larger players with more political clout resting with smaller shippers.

Hirschey, a longtime student of Buffett's methods, said the rail bet helps hedge his other large bet that rests on the financial industry. Berkshire is the largest stockholder of Wells Fargo & Co. and American Express Co. and the fourth-largest owner of U.S. Bancorp.

"This is a diversification that will smooth out the rates of return they can expect to get from what can be pretty bouncy financial stocks," Hirschey said.

And smoother returns are more important, he said, now that Buffett has pledged his Berkshire fortune to the Bill and Melinda Gates Foundation.

Rail industry analysts called the deal a stamp of approval on a sector that often gets overlooked.

The nation's roadways wouldn't be able to handle all the freight that would move during a broadening economic recovery, and that sets up the railways to prosper.

"When the economy gets going again, the railroads will be well-positioned to provide more capacity and offer better service," said Satish Jindel, president of SJ Consulting Group, a transportation consulting firm.

Other rail stocks also rallied on the Buffett acquisition, but analyst Jason Seidl, transportation analyst at Dahlman Rose & Co., said the acquisition would not trigger further consolidation in the industry. BNSF had been mentioned earlier this decade as a potential acquirer of Kansas City Southern, the smallest of the major railroads.

BNSF is the biggest rail operator in the Kansas City area. The rail company's area head count jumps to 3,600 by including Topeka and St. Joseph.

It has a rail yard on each side of the state line, and it has more than 120 trains running through Kansas City every 24 hours, spokesman Steve Forsberg said.

Kansas City's middle-of-the-country location places it at the intersection of two of BNSF's biggest routes: Moving coal southward from the Powder River Basin in Wyoming and Montana, and the transcontinental route that moves goods between Los Angeles and Chicago.

"Kansas City is for our freight movement what O'Hare International is for passenger traffic," Forsberg said.

The company also has a training academy at Johnson County Community College, providing courses for railroad jobs, including conductors, dispatchers, locomotive engineers and mechanics.

The planned freight hub in Kansas is expected to include a distribution and warehouse area that could add thousands of jobs to the complex.

It has faced some local opposition, but BNSF continues to seek approval from the Army Corps of Engineers.

Kansas officials are seeking a $50 million grant from the transportation infrastructure portion of the federal stimulus bill to that could lead to a groundbreaking next year.

"I think the investment by Buffett's firm is a statement of the strength of the rail industry and the prospects of the growth in that industry moving forward," said Chris Gutierrez, president of Kansas City SmartPort Inc. "For Kansas City and its transportation industry, it is positive for our intermodal development and our long-term growth in logistics."

If past is any prologue, the BNSF will run much as it has in the past. Berkshire has a long history of buying well-run businesses and telling management to keep up the good work.

Barnett Helzberg sold his jewelry business to Berkshire Hathaway in 1995, and it has remained independent of other jewelry chains the group owns. When the founder visits stores today, they still feel like Helzberg's stores to him.

"He doesn't believe you put your jewelry companies together," Helzberg said of Buffett.

Buffett's hands-off approach doesn't mean his acquisitions enter a time capsule. Helzberg's Diamond renamed the Jewelry3 stores that Barnett Helzberg had started as stand-alone stores, keeping them distinct from the shopping-center-based Helzberg stores.

Helzberg said sellers also know they're putting in with strong hands.

"He brings tremendous security to the company," he said. "They know they got one of the strongest companies behind them."

The Associated Press contributed to this report.

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