Tuesday, November 03, 2009

BNSF agrees to acquisition by Berkshire Hathaway Inc.

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Omaha-based Berkshire Hathaway Inc., the holding company led by well-known billionaire Warren Buffett, announced Tuesday it has reached agreement with Burlington Northern Santa Fe Corp. to purchase the roughly 78% of BNSF stock it does not yet own, for $26 billion.

Berkshire Hathaway, in a press release, said, “Based on the number of outstanding BNI shares (including shares currently owned by Berkshire) on Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt, making it the largest acquisition in Berkshire Hathaway history.”


The deal has already been approved by the board of directors at both companies, with BNSF’s board ratifying the agreement late Monday night. The agreement still is subject to BNSF shareholder approval,  and to review by the Department of Justice. BNSF will work with other regulatory agencies, including the Surface Transportation Board, to describe the transaction. The transaction is expected to be completed during the first quarter of 2010.


In a statement, BNSF Chairman, President, and CEO Matt Rose (pictured at left) said, “We are thrilled to have the opportunity to become a part of the Berkshire Hathaway family.” He added, “We admire Warren’s leadership philosophy supporting long-term investment that will allow BNSF to focus on future needs of our railroad, our customers, and the U.S. transportation infrastructure.”


One Washington, D.C. source told Railway Age BNSF's executive team would remain in place at the company's Fort Worth, Tex., headquarters. Berkshire Hathaway affirmed in its press release that BNSF “will continue to focus on providing outstanding service to its customers from its Fort Worth, Tex. headquarters,” while Buffett (pictured at right) lauded the current management, saying, "Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry."

“Most important of all, however, it’s an all-in wager on the economic future of the United States. I love these bets,” Buffett said.

Berkshire Hathaway says it will pay $100 a share in cash and stock for the rest of the company, a 31.5% premium on BNSF’s share closing price Monday on the New York Stock Exchange. Shareholders have the option to convert their stock for a cash payment of $100 per share or receive Berkshire Class A or Class B common stock. Up to 60% of the deal is cash and 40% is in stock. Berkshire Hathaway will fund $16 billion of the purchase with cash, and the remainder in stock. Of the $16 billion cash share, it will pay $8 billion from its own cash reserve.


Wall Street responded enthusiastically early Tuesday morning, running counter to the Dow Jones Industrial average. Shares of BNSF (BNI) remained up more than 28%, shortly after noon, hovering at $97.55, just below the benchmark, and also below the stock’s 52-week high of $97.98. The stock was still at or near $97.55 one half-hour before the closing bell Tuesday; shares finally retreated modestly, ending the trading day at $97.00, still up an impressive 27.51%.

The majority of the stock in the deal will be Berkshire’s “A” shares, but Berkshire’s board also approved a 50-for-1 split of its Class B common stock for holders of smaller amounts of BNSF shares who opt for a share exchange rather than cash. Berkshire'’s Class B shares closed Monday at $3,265. With the split, each share will be worth $65.30.

Purchase tackles the energy angles 

One analysis suggests Berkshire Hathaway not only is committing to the future of U.S. freight railroading, but is also making a strategic move to bolster support for coal energy despite environmental concerns. Berkshire Hathaway owns MidAmerican Energy Holdings, which controls power companies in the Midwest and Pacific Northwest regions served by BNSF, and which has voiced disapproval over climate change legislation aimed at coal-fired plants.

But Buffett has made it clear he believes rail also has a distinct advantage in energy efficiency over other modes as well. At Berkshire Hathaway’s annual meeting last May, held in Omaha, Buffett noted, “As oil prices go up, higher diesel fuel raises costs for rails, but it raised costs for its competitors, truckers, roughly by a factor of four.”

At Morgan Stanley Research, analysts William Greene, AdamLongson, and John Godyn observe, “Buffett believes rails look cheap: Berkshire’s BNI acquisition is a long-term bet on railroads and the U.S. economy, but also signals there is significant value in rail stocks today.”

Despite skepticism 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 IRR [internal rate of return] despite the premium.  In other words, consensus estimates are far too low for 2010 and beyond given volume recovery, pricing durability, and productivity,” the analysts said.

They added, “To make such a large investment, Berkshire must also believe regulatory concerns are unlikely to impact rail economics. If correct, using similar multiples on other rail stocks would imply 30-40% upside across the group.”

Besides BNSF, Berkshire Hathaway also held more modest holdings in at least two other Class I railroads through June 30: 9.56 million shares in Union Pacific Corp., which competes directly with BNSF; and 1.93 million shares of Norfolk Southern Corp.


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