Berkshire Hathaway Inc. agreed to acquire the 77% of Burlington Northern Santa Fe Corp. it doesn’t already own for about $26 billion in cash and stock, placing a hefty wager on the economic recovery. The deal values all of the railroad holding company at $34 billion. Berkshire Chairman and Chief Executive Warren Buffett called the deal, Berkshire’s biggest ever, “a huge bet and one that I’m very happy to make, but it’s not a bet on next month or next year. We’re going to own it forever.”
The $100 a share he offered was “all I could pay,” he said in an interview, structuring the deal as 60% in cash and the rest in stock because “we couldn’t do an all-cash deal.” Mr. Buffett said he was loath to part with Berkshire shares but that doing so was “necessary to get the deal done.” After the purchase, Berkshire will have $20 billion in cash, he said. Berkshire, Omaha, Neb., also will assume $10 billion of Burlington Northern debt.
Matthew K. Rose, Burlington Northern’s chairman, CEO and president, said the deal took about 10 days to work out, from Berkshire’s offer to the railroad’s board meeting Monday night. Mr. Buffett “knows exactly what he wants and he’s pretty fair,” Mr. Rose told Fox Business News.
Mr. Buffett’s move appears to be a bet that the freight industry is poised for recovery, though it hasn’t shown much of a rebound yet. The best that most rail executives have said about volume is that it seems to have hit bottom. Burlington and other top railroads are considered a barometer of economic activity because of the breadth of goods they carry, and Mr. Buffett has said he uses weekly railroad data as a proxy for the economy’s health.
The acquisition also exemplifies Mr. Buffett’s taste for solidly profitable companies that aren’t dependent on cutting-edge technology. Burlington Northern, Fort Worth, Texas, is viewed as one of the best-managed U.S. railroads, though recently it has underperformed its rivals and last month it cut its fourth-quarter forecast. Burlington Northern reported that third-quarter profit fell a less-than-expected 30% as revenue and volume fell across the board.
The company has 32,000 miles of track in 28 states and Canada, and its $18.02 billion in sales last year made it just barely the No. 1 rail company in the U.S., ahead of Union Pacific Corp.
The purchase would help secure a supply chain for Berkshire’s rapidly expanding energy businesses. Berkshire owns MidAmerican Energy Holding Co., which operates a natural-gas pipeline and power companies in the Midwest and Northwest. Burlington tracks run through the regions, a coal-supply route for power plants.
Mr. Buffett said Burlington Northern was a similar business to MidAmerican. “I would use the word solid,” Mr. Buffett said. “There’s nobody better at running a railroad than Matt Rose.” Mr. Buffett said that the railroad’s management team is part of what made the deal attractive.
The $100 a share Berkshire is paying is a 31% premium to the railroad’s closing price Monday. Burlington Northern’s shares were up about 28% Tuesday afternoon. Berkshire’s Class A shares rose slightly.
Berkshire stuck the deal with Burlington Northern’s stock trading about 50% higher than its March lows. “You do what you can when you can,” Mr. Buffett explained.
“It doesn’t look like he got this on the cheap,” said Catherine Seifert, an analyst with Standard & Poor’s. She said the deal could change Berkshire’s profile from that of an insurance-based conglomerate heavy on financial services to more of an industrial company. “What is this telling us about his feeling about investing in financial services when his big bet is outside financial services?”
The deal comes after a five-year rail renaissance that saw volume and pricing soar. That ended as the recession cut deeply into traffic and profits. Railroad operators have used the slump to boost efficiency, but future investment hinges on a slew of tax credits and other measures being pushed by industry executives in Congress.
Longbow Research analyst Lee Klaskow said Burlington Northern has “fantastic franchises” in coal and agricultural products that will rebound once the economy turns a corner. “In the long term, it will probably be a great deal for Berkshire Hathaway.”
Under the deal, Burlington Northern stockholders will have the choice to exchange each share for either $100 in cash or Berkshire stock. Mr. Buffett said a decision announced Tuesday to split Berkshire’s Class B shares on a 50-1 basis was meant to create a tax-free deal for Burlington Northern shareholders, some of whom might not have had enough stock to exchange for a Class B share of Berkshire Hathaway, which traded at $3,326 Monday.
The acquisition, which has been approved by the boards of both companies, is subject to approval by regulators and Burlington Northern shareholders. The companies expect the transaction to close in the first quarter.