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November 03, 2009

Berkshire Hathaway to buy BNSF for $US 34 billion

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THE world's second richest man Mr Warren Buffett has sealed the biggest deal in his distinguished career after his investment company, Berkshire Hathaway, reached an agreement to acquire the remaining 77.4% of US Class 1 railway BNSF for around $US 34 billion.
The transaction, which includes BNSF's $US 10 billion outstanding debt, means Berkshire Hathaway will become the sole shareholder in North America's second largest railway. Regulatory approval of the deal is expected in the first quarter of next year.
Berkshire Hathaway paid around $US 100 a share in cash and stock for the remainder of the company, a 31.5% premium on BNSF’s share closing price Monday on the New York Stock Exchange.
Morgan Stanley Research analysts Mr William Greene, Mr Adam Longson, and Mr John Godyn told IRJ's US sister magazine Railway Age: “Buffett believes rail looks cheap. Berkshire's acquisition is a long-term bet on railroads and the US economy, but also signals there is significant value in rail stocks today.” Despite scepticism in some quarters that BNSF’s earnings per share don’t justify the premium being offered by Berkshire Hathaway, “Berkshire's successful investment track record suggests Buffett believes he is likely to enjoy a substantial rate of return, despite the premium. In other words, consensus estimates are far too low for 2010,” the analysts said.
 "Our country's future prosperity depends on an efficient and well-maintained rail system," says Buffett. "Conversely, America must grow and prosper for railroads to do well. Berkshire's $US 34 billion investment in BNSF is a huge bet on that company, CEO Mr Matt Rose and his team, and the rail industry. But, most important of all, it's an all-in wager on the economic future of the United States. I love these bets."
Buffett has already made it clear he believes rail has a distinct advantage in energy efficiency over other modes. At Berkshire Hathaway’s annual meeting in May, he noted, “As oilprices go up, fuel raises costs for rail, but it raised costs for lorries, roughly by a factor of four.”
Mr Luther Miller, Senior Editorial Consultant to Railway Age, believes the deal could change attitudes to the rail industry. "This could profoundly affect the way the country and Wall Street perceives railways," he says.
Wall Street responded enthusiastically to news of the sale on Tuesday morning, with BNSF share prices soaring 28% to to almost $US 100, the highest level for 12 months.
In recent years Berkshire Hathaway has consistently increased its stake in BNSF, and in 2007, at a time when it was increasing its shares in BNSF, the company sold its holdings in two other US Class 1s, Norfolk Southern and Union Pacific. 

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