The Herald, Sharon, Pa.

Business

November 3, 2009

Buffett goes ‘all-in,’ buying Burlington Northern railroad

NEW YORK — Legendary investor Warren Buffett is making what he calls an “all-in wager” on the U.S. economy — $34 billion to buy a major railroad that hauls everything from corn to cars across the country.

Burlington Northern, the nation’s second-largest railroad, is the biggest hauler of food products like corn, and coal for electricity, making it an indicator of the country’s economic health. The railroad also ships a large amount of consumer goods — including items imported from Asia — from big Western ports like Los Angeles and Seattle.

Analysts say Buffett is planting both feet in an industry that is poised to grow as the economy gets back on solid ground. It would be the biggest acquisition ever for Berkshire Hathaway Inc.

Berkshire Hathaway already owns about 22 percent of Burlington Northern, and will pay $100 a share in cash and stock for the rest of the company. That was 31.5 percent premium on Burlington Northern’s Monday closing price. The stock shot up over 28 percent Tuesday, to $97.66 in afternoon trading.

Shareholders have the option to convert their stock for a cash payment of $100 per share or receive Berkshire Class A or Class B common stock. Up to 60 percent of the deal is cash and 40 percent is in stock.

“Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry,” Buffett said in a statement.

“Most important of all, however, it’s an all-in wager on the economic future of the United States. I love these bets,” he said.

Berkshire’s board also approved a 50-for-1 split of its Class B common stock for holders of smaller amounts of Burlington shares who opt for a share exchange instead of cash. The Class B shares rose $67.20, or 2.1 percent, to $3332.23 on Tuesday.

Berkshire owns stock in two other major railroads — about 1 percent of the outstanding shares of Union Pacific Corp. and less than 1 percent of Norfolk Southern Corp., as of June 30. Buffett started investing in railroads in 2007, but has said he realized a few years late that railroads had become an appealing investment.

He thinks railroads are a key economic indicator because of the amount of retail and manufactured goods they haul across the country. “They do it in a cost-effective way and extraordinarily environmentally friendly way,” he 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.”

Last week Burlington Northern reported third-quarter profit dropped 30 percent from a year earlier. Burlington Northern made almost a third of its money in the last quarter from shipments of consumer products from the West to major hubs like St. Louis, Kansas City and Chicago.

It’s next largest segment was coal, at 27 percent of revenue, followed by industrial products — like farm equipment, lumber and chemicals — at 21 percent. The agricultural products segment — 20 percent of its total revenue — includes major crops like corn, wheat and soybeans — much of that exported to China.

Burlington Northern serves more of the nation’s major grain-producing regions than any other railroad.

Analysts say Buffett is looking for an investment that will reap rewards for many years into the future, and isn’t so concerned about immediate gains.

“(Buffett is) buying at the trough — things aren’t going to get much worse. He’s getting in at a good time,” said Art Hatfield, an analyst with investment firm Morgan Keegan.

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