Railroad shipping: Buffett, Berkshire Hathaway set to buy BNSF
$44 billion deal represents Warren Buffett's "all-in" wager on the economic future of the United States
Jeff Berman, Group News Editor -- Logistics Management, 11/3/2009
Putting his chips in on an "all-in wager of the economic future of the United States," billionaire investor Warren E. Buffett and his investment group Berkshire Hathaway announced today they will acquire Class I railroad carrier Burlington Northern Santa Fe.
Under the terms of the transaction, which is expected to close during the first quarter of 2010, Berkshire Hathaway will pay $100 per share in cash and stock to acquire the remaining 77.4 percent of outstanding BNSF shares it did not already own. Company officials said that transaction is valued at roughly $44 billion, which includes $10 billion of outstanding BNSF debt.
"Our country's future prosperity depends on its having an efficient and well-maintained rail system," said Buffett in a statement. "Conversely, America must grow and prosper for railroads to do well. Berkshire's...investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry."
BNSF Chairman, President, and CEO Matt Rose noted that this transaction will allow BNSF to focus on the future needs of its railroad, its customers and the U.S. transportation infrastructure. He added that this transaction offers compelling value to BNSF shareholders and is in the best interests of all of its constituents, including customers and employees."
As one of the largest U.S. Class I railroads, BNSF is heavily involved as a provider of intermodal services and transports the most grain of all U.S. Class I railroads, as well as high levels of coal. It was established in 1995, when Burlington Northern Inc. and the Santa Fe Pacific Corporation merged. This merger created a network comprised of more than 34,000 route miles across-ranging from the Pacific Northwest and Southern California into the Midwest, Southeast, and Southeast-across nearly 30 states and into parts of Canada.
Analyst commentary: Various industry experts told LM this transaction makes sense on a few different levels.
"I think Warren Buffett had a high regard for BNSF management, particularly Matt Rose," said Brooks Bentz, a partner in Accenture's supply chain practice. "Matt has put together a superb management team. It was not long ago that people looked at U.S. railroad management and though it was not very good. The entire industry has upgraded its management talent across the board, and BNSF is a leader on that front."
Bentz added that while the transaction sum is large, the bet Buffett is taking on BNSF is not. Bentz explained that the U.S. population is expected to rise from 300 million to a forecasted 420 million by 2050, with many of these people living in congested areas like the East Coast, Gulf Coast, and West Coast.
This growth, he said, will continue to put stress on a weathered transportation infrastructure system which is woefully underinvested in. These factors, coupled with expected peak oil production by 2011 and conventional oil supply potentially expiring by 2050, which will drive up energy prices, will benefit the railroad industry, as fuel costs could go way up, highways will be more congested, and shippers will need lower-cost alternative modes of transport for many goods. If Buffett has considered these elements, said Bentz, he will be encouraged that BNSF is a good investment, adding that it can be viewed as a "can't miss" regardless of what is happening with the economy. He also noted that this deal portends a bright future for the rail industry's growth prospects, too.
This was supported by Credit Suisse Analyst Chris Ceraso, who wrote in a research report that this deal is a major vote of confidence in the long-run cash-generating capability of the railroads and suggests that neither pricing pressure nor regulatory pressures are likely to de-rail the profit and cash flow story for these companies.
"This deal is a big surprise," said Tony Hatch, principal of New York-based ABH Consulting. "There was a lot of private equity interest in the railroads in the last cycle, but the railroads were not interested. The advantages for railroads are that they have the tension between short- and long-term decision making-that is the big issues of the economy today as compared to trying to plan for assets that are going to last for 50 years, which is not completely unique but it is pretty rare. If you remove quarter-to-quarter issues and let railroads plan longer-term, you can make the argument that it makes a lot of sense."
Hatch added that it is premature to state if this deal is a sign of future like-minded railroad investments to come, because the private equity industry is not the same as it was a few years ago, and access to capital is not as easy as it was then. But he said that Buffett is a pretty rare individual that can spend $44 billion on BNSF, which Hatch said was a good deal for Buffett.
BNSF, said Hatch, is also the most internationally-focused of all U.S. Class I railroads, as evidenced by its huge intermodal and grain positions, which makes the deal not only a bet on the heartland but on globalization, too, as BNSF was quite successful in the last cycle by importing containers from China.
Regulatory aspects: In a conference call earlier today, BNSF and Berkshire Hathaway explained that the Surface Transportation Board (STB) is required to review and approve mergers between two railroads or when a railroad is purchased by an entity that owns or controls another railroad. They added that this transaction is not a merger of railroads, and that Berkshire Hathaway does not control any other railroads.
Because of this, they added that the STB merger review regulations and process would not apply to a change in shareholder ownership which does not involve another railroad. And when the transaction is completed, they said the STB's established economic regulatory standards and procedures would continue to apply to BNSF.
View All On-Demand Webcasts