Berkshire to buy BNSF

Wow. What does this mean for BNSF? Railroads? Does Berkshire or Buffett own any other railroad stock?

http://online.wsj.com/article/SB1000142 ... lenews_wsj

BY JOHN KELL

Berkshire Hathaway Inc. said it will acquire the 77% of Burlington Northern Santa Fe Corp. it doesn't already own in a cash and stock deal that values the railroad company at $34 billion and marks Warren Buffet's largest acquisition.

The deal values Burlington Northern at $100 a share, a 31% premium to Monday's closing price.

Well, for one thing the Burlington sure shouldn't have trouble raising money for capital improvements going forward.

Berkshire doesn't seem to own major positions in any other rails-- at least not in any of the Class I's.

What this means of the industry I don't know. Will be interesting to see how it plays out.

Does this need STB approval even though Berkshire is not a rail operator?

I know it's not New York State, but I can't resist posting this interesting news here... as much of the financing/dealmaking probably happened in New York State!

http://dealbook.blogs.nytimes.com/2009/ ... illion/?hp

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 $34 billion in cash and stock, in the largest deal in Berkshire history.

The deal, which will also include the assumption of $10 billion in Burlington Northern debt, 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.”

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.....

No need for STB approval. As stated in the merger FAQ:
http://www.bnsf.com/investors/presentat ... -03-09.doc (Word document):

With respect to the Surface Transportation Board (STB), the law requires the STB to review and approve mergers between two railroads or when a railroad is purchased by an entity that owns or controls another railroad. This is not a merger of railroads, and Berkshire Hathaway does not control any other railroads. Under established precedent, the STB merger review regulations and process would not apply to a change in shareholder ownership which does not involve another railroad. After the transaction is completed, the STB's established economic regulatory standards and procedures would continue to apply to BNSF Railway Company.

Berkshire owns stock in Union Pacific and Norfolk Southern, but not a controlling interest.

Good point about the capital improvements. Warren Buffet has often described his talents as: "I allocate capital." Traditionally, Berkshire Hathaway has been composed of two types of operations: (1) the ones that sent bundles of cash up to the mothership (2) the ones that didn't. BNSF would fall under category 2.

It's very appealing for a manager. No need to issue debt or equity or deal with banks or the credit rating agencies. Just pick up the phone, give Warren a call, and explain why you need the capital. He usually makes a decision in under an hour.

I would imagine if BH has an interest in NS, Buffett will have to divest it when they acquire BNSF.

Good morning Mr Harriman, errr, Buffett!

We'll see how far the regulators let him go. One thing is for sure, Warren Buffett does not invest to lose money.

BUFFETT'S
NEW
SANTA
FE


Awesome. Gotta say, if the age of the tycoon is back, I'm happy.

Also, it's a tribute to Matt Rose and his team as well. I don't think there's much more talented of a team out there than Mr. Rose and his guys.

Oh well, soon there will have to be a new disclaimer:

author holds position in BRK-B

The position BRK holds in NSC is not controling; I doubt if any agency will require divestiture of such.

BNSF... a diamond in the rough ? Can anyone speculate on what the shiny glimmer is Mr. Buffet sees in BNSF ? Has something recently changed for the better at BNSF, like a major contract, or a strategic alliance ?

My limited knowledge of this Class 1 includes the following:
1) BNSF has important access to the Powder River Basin coal.
2) It has strategic port access on the West Coast for transcontinental intermodal.
3) A large portion of the system runs through the upper midwestern grain belts.

America's bread basket is a major source of carload revenue, even in times of recession. We all must eat the basics to live, so grain will always be in demand, and need to be transported, unless mother nature provides enough inclimate weather to diminish the crop yields.

Coal is a big issue right now. It would appear to be on the decline for domestic use, now that Obama is trying to reduce our greenhouse emissions. However, China is contracting with Norfolk Southern to fill up ships with coal bound for China. So perhaps this is the key reason for the gamble on Buffet's part.

It has been expected that US intermodal traffic will skyrocket over the next 5 to 10 years as the World's population and economy continues to flourish and grow, and the US mainland infrastructure deteriorates and becomes snarled with traffic. Once we fully recover from this current recession, the railroads may see a surging growth in intermodal like they've never seen before.

Recently seen on the rails - Berkshire owns Geico:

Sarge wrote: Does Berkshire or Buffett own any other railroad stock?

Berkshire owns 1% of UP and less than 1% of NS

Well, one wonders ....... that's about all that can be said until reaction comes in from sectors of the public not as closely attuned to the rail industry.

I don't think it's a stretch of the imagination to point out that the debate over the extent of public oversight of, and participation in the economy has intensified in recent years, with the activist alliance between the ideological Left and the ledership of the Democratic party as the prime mover.

Warren Buffet often likes to depict his personal political leanings as those of a moderate Democrat. But his operation is headquartered in one of the most economically-conservative (and prosperous, and recession-resistant) states in the nation.

The economic heritage of Burlington Northern Santa Fe is likewise rooted in the philosophy of James Jerome Hill ..... maximum ton miles with minimum train miles, and while a preliminary search on my part shows some use of land grants to stretch capital resources, the Great Northern was neither as active nor as agressive a participant in these efforts as was its rival Northrn Pacific. Both were, of course, drawn into the Northern Securities imbroglio which is considered a landmark example of public-sector intervention in the name of "progressivism".

And of course, within 25 blocks of Berkshire Hathaway's headquarters at 35th and Farnham lie the headquarters of Union Pacific at 15th and Dodge. And Union Pacific has a long and, almost by definition, contradictory history of off-again, on-again involvement with the Federal Government. from the Civil War generals involved in its founding through a well-connected leadership (who sometimes showed feet of clay), and perhaps best symbolized by former SecTrans Drew Lewis.

Were she still with us, I'm sure Ayn Rand would have a few things to say about what's going on in Omaha right now, but I'm also well aware that she had something less than a full grasp of how the rail industry acually operates.

Flat-Wheeler wrote:BNSF... a diamond in the rough ? Can anyone speculate on what the shiny glimmer is Mr. Buffet sees in BNSF ? Has something recently changed for the better at BNSF, like a major contract, or a strategic alliance ?

My guess is that the motivation mentioned by one of his employees when they first got into BNSF stock a couple years ago still holds. Explaining that they had always believed rail to be at a competitive disadvantage with trucking, but that conditions had changed, he explained (and I'm doing this from memory, but you could google the key words and find it) "it's a three-legged stool - fuel costs, highway congestion, and carbon."

Interestingly, UP is local for them in Omaha. Perhaps UP is overpriced, or they don't like some aspect of the competitive situation, but they often pick an industry and then pick the best management team in that industry. It's hard not to believe that they've seen UP up close and don't believe in the management over there.

2nd trick op wrote:
I don't think it's a stretch of the imagination to point out that the debate over the extent of public oversight of, and participation in the economy has intensified in recent years, with the activist alliance between the ideological Left and the ledership of the Democratic party as the prime mover.

Warren Buffet often likes to depict his personal political leanings as those of a moderate Democrat. But his operation is headquartered in one of the most economically-conservative (and prosperous, and recession-resistant) states in the nation.

The economic heritage of Burlington Northern Santa Fe is likewise rooted in the philosophy of James Jerome Hill ..... maximum ton miles with minimum train miles, and while a preliminary search on my part shows some use of land grants to stretch capital resources, the Great Northern was neither as active nor as agrssive participant in these efforts as was its rival Northrn Pacific. Both were, of course, drawn into the Northern Securities imbroglio which is considered a landmark example of public-sector intervention in the name of "progressivism".

And of course, within 25 blocks of Berkshire Hathaway's headquarters at 35th and Farnham lie the headquarters of Union Pacific at 15th and Dodge. And Union Pacific has a long and, almost by definition, contradictory history of off-again, on-again involvement with the Federal Government. from the Civil War generals involved in its founding through a well-connected leadership perhaps bbest symbolized by former SecTrans Drew Lewis.

Were she still with us, I'm sure Ayn Rand would have a few things to say about what's going on in Omaha right now, but I'm also well aware that she had something less than a full grasp of how the rail industry acually operates.

Perhaps, but again, one of the key motivations mentioned by Berkshire people is the probability of a carbon tax in the near term. You may be on to why they've chosen BNSF over UP. But in getting into rail they've explicitly side-tracked their concerns about government involvement in the economy.

I'm ashamed to ask this since I have my MBA. But how can a company buy 100% of the stock of another? What if a shareholder didn't want to sell? I presume there's a process where they can be forced to sell?

I'm glad I don't work for the company. The more I've learned about the Warren Buffet, the less I'm impressed. But I guess this isn't the time or place to go into that.

Hope it works out the best for BNSF's employees and the industry as a whole.