Legendary investor Warren Buffett is making what he calls an “all-in wager” on the US economy — US$34 billion to buy a major railroad that hauls everything from corn to cars across the country.
Burlington Northern Santa Fe Corp (BNSF), the second-largest US 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 US$100 a share in cash and stock for the rest of the company. That was 31.5 percent premium on Burlington Northern’s closing price on Monday. The stock shot up over 28 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.”
The Burlington Northern deal will be the biggest deal yet in a career of big deals. The deal will make freight railroads Berkshire’s third-largest industry after insurance and utilities.
Berkshire prefers to buy companies instead of just investing in stocks. Buffett has simple standards for what he looks for in an investment easy-to-understand large companies with a strong competitive advantage that generate cash and above-average returns on capital.
Over the years, Buffett’s company has bought more than 60 subsidiaries; including clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co and Wells Fargo & Co.
Berkshire’s biggest acquisition before BNSF was the US$16 billion stock purchase of reinsurance giant General Re in 1998.
Analysts who follow Berkshire say the BNSF deal will reshape the company because of the railroad’s size.
Justin Fuller, who works with Midway Capital Research & Management in Chicago and writes about Berkshire at www.buffettologist.com, said this was the kind of elephant deal that Buffett seems to be able to find once every five or six years.
Berkshire plans to release its third-quarter earnings report tomorrow.