Published November 4, 2009

US$26b railway deal is Buffett's biggest buy ever

Acquisition by Berkshire is a bet on US economy

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(NEW YORK) Warren Buffett's Berkshire Hathaway Inc will pay US$26 billion to buy out railway Burlington Northern Santa Fe Corp (BNSF) in what the billionaire investor called a bet on the US economy.

The deal, Mr Buffett's biggest-ever acquisition, is priced at a premium of 31.5 per cent over BNSF's closing stock price on Monday and values the railway at US$34 billion.

'It's an all-in wager on the economic future of the United States,' Mr Buffett said in a statement, adding that railways are key to the US economy and will benefit as recovery takes hold. 'I love these bets.'

Berkshire Hathaway will pay US$100 per share in cash and stock for the 77.4 per cent of BNSF shares it does not already own. Berkshire will also assume US$10 billion of BNSF debt. The deal is expected to close in the first quarter of 2010.

Shares of railway companies rallied in pre-market trading following news of the deal, and stock index futures pared losses.

'For the market, it can be seen as a sign of confidence (about the economy),' said Peter Boockvar, equity strategist at Miller Tabak + Co in New York, adding that it was logical for Mr Buffett to buy the rest of the railway.

'Berkshire is seeing way past some impending economic recovery signs now and looking into the future,' he said.



BNSF shares were up 29 per cent to US$98.18 in pre-market trading. Berkshire's board approved a 50-for-one split of the company's Class B common stock to help ease the way for the deal.

'We'll have more people moving more goods 10, 20, 30 years from now,' Mr Buffett, Berkshire chairman and CEO, said on CNBC television. 'I just believe this country will prosper.'

He said that he was not interested in buying the rest of BNSF rival Union Pacific Corp, whose shares he also owns. He said that he expected the companies to remain rivals for the next half century.

'We won't be making any huge deals for a while,' he told CNBC. 'I made (BNSF CEO Matt Rose) an offer and he said he would take it to his board and it took about 15 minutes.'

Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said that the deal was a bet on the future of coal as a source of energy.

'Because Burlington Northern moves coal around the country, I think Buffett is trying to get into coal, but doing it in a cheaper way,' he said. 'It's leveraged against coal's demand without actually having to buy the commodity itself.'

Some analysts said that the deal did not necessarily signal a wave of mergers and acquisitions in railways.

'For an outsider to make an acquisition of a railroad or invest a significant amount in a railroad - you may see more people get interested in that possibility,' said George Van Horn, senior analyst with market research firm IBISWorld.

'But as far as seeing railroad themselves merging, I wouldn't expect that right away,' he said.

Shares of BNSF rivals rose on news of the deal. Union Pacific gained 8 per cent to US$59.40, Norfolk Southern Corp jumped 8 per cent to US$50.40, and CSX Corp was up 8 per cent to US$46.20. -- Reuters