Buffett places big bet with $34 billion railway purchase

Burlington Northern Santa Fe Railway is Buffett's biggest deal.
Burlington Northern Santa Fe Railway is Buffett's biggest deal. (Kevin P. Casey/associated Press)
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By Frank Ahrens
Wednesday, November 4, 2009

Berkshire Hathaway chairman and world's second-richest man Warren Buffett said Tuesday that his $34 billion purchase of Burlington Northern Santa Fe Railway is a bet on America's future.

It's a bet, but not just on America. With the investment, Buffett is also betting on China's rebound and growth, the price of oil going back up, the continued use of coal to make electricity and a higher profile for the nation's railroads, thanks to a push from the White House.

Buffett already owned 22 percent of the Western U.S. railroad giant; the deal announced Tuesday would give him the entire railroad, the second-largest of the nation's six major lines. It marked the biggest deal to date for Buffett, who also owns or has large stakes in Coca-Cola, Dairy Queen, Wrigley, Geico and several other companies, including The Washington Post Co., where he is a director and the largest non-family shareholder.

Buffett began buying into Burlington Northern (BNSF) in 2007, and took his position up to 22 percent. His accumulation of BNSF shares coincided with the resurgence of America's moribund freight rail industry. In the 1970s and '80s, traffic had dropped so much that companies actually tore up unused tracks, as manufacturers switched their shipping away from railroads to cheaper 18-wheelers. But as fuel prices soared and U.S. demand for Chinese imports surged, railroads experienced a rebirth. Their stock soared.

Railroad stocks peaked in summer 2008, when oil hit its high of $147 per barrel. As the recession kicked in, fewer goods were shipped, hurting the railroads. When oil prices drop, manufacturers switch their shipping from trains back to trucks, which can transfer goods directly without the transfers required in rail travel. To help out the industry, the federal government set aside $48 billion of the $787 billion stimulus for infrastructure improvement, some of which goes to railroads. BNSF's cut of stimulus money is $28.7 million, for a bridge between Iowa and Illinois.

Given the up-and-down nature of the U.S. railroad industry, why is Buffett investing $34 billion in it now in a cash-and-stock deal that includes $10 billion in debt?

"Our country's future prosperity depends on its having an efficient and well-maintained rail system," Buffett said in a release. "Conversely, America must grow and prosper for railroads to do well. Berkshire's $34 billion investment in BNSF is a huge bet on that company, chief executive Matt Rose and his team, and the railroad industry."

The 79-year-old Buffett invests for the long-term; meaning, for decades after his death.

"Buffett is making an elephant-sized bet on three things here and all are related," said Art Hogan, Jefferies managing director. "He thinks the economy in the U.S. is getting better and will continue. He believes that energy prices will continue to rise and that trains will be more productive than trucks in that environment, and third, and most important, he sees Burlington Northern as cheap with a longer-term investment time horizon."

Miller Tabak equity strategist Peter Boockvar said: "He's betting on global population growth and global wealth increasing, thus raising the world's purchasing power to buy stuff that the U.S. makes, and also a bet that we will still import stuff that the rest of the world makes."

Buffett, an early supporter of President Obama, also is betting on the administration's promises to shore up the nation's infrastructure and support railroads as a way of taking trucks off the road. Also, the White House supports "clean-coal" technology, signaling a prominent place for coal in the nation's energy future.

Shares of BNSF are trading well up off their March bottom -- they closed up 28 percent at $97 Tuesday on the Buffett news and took the rest of the railroad sector along for the ride up.

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