Little over one year after scribing the famous "Buy American, I Am" editorial in the New York Times, Buffett is putting action behind his words and buying a big chunk of America.
This morning, Berkshire
(BRK.B)
announced it will be buying Burlington Northern Sante Fe
(BNI)
in its entirety. Berkshire had already accumulated 22.6% of
Burlington's stock before today. The company will be paying
approximately $34 billion (including its existing investment) for the
equity and assume approximately $10 billion in debt.
Though this will be the largest purchase in Berkshire's history--and
one of the largest in the country's history for that matter--Berkshire
will be able to use existing cash on its balance sheet to pay for the
cash portion of the purchase. (Anyone still think Berkshire has
anything but an AAA credit profile?)
As part of the deal, Berkshire also announced a 50-for-1 split of
its B-shares. The split will enable those with relatively small
investments in Burlington to elect to receive payment in Berkshire
stock if they desire to do so for tax-efficiency reasons.
Here is what I consider to be the essential part of the press release:
"Our country's future prosperity depends on its having an efficient
and well-maintained rail system," said Warren E. Buffett, Berkshire
Hathaway chairman and chief executive officer. "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, 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," said Mr. Buffett. "I love these
bets."
This acquisition makes a great deal of sense for Berkshire Hathaway.
Railroads have relatively stable moats, due to valuable rights-of-way
that are nearly impossible to duplicate. They also have a competitive
advantage in the form of higher fuel efficiency than alternative modes
of transportation. Moreover, railroads can be very capital-intensive,
which is actually a good thing when paired with a company like
Berkshire that is continually looking to put large slugs of capital to
work.
Our stand-alone valuation for Burlington was $90 per share, which is
only modestly below the $100 purchase price. Plus, Burlington may be
worth a bit more under the Berkshire umbrella, given Berkshire's
numerous existing businesses and relatively low cost of capital. As a
result, our Berkshire Hathaway fair value estimate is not going to
change as a result of this deal.
My opinion of Berkshire Hathaway is not changed by today's news, and
I'm happy to continue holding a relatively large position in the
Tortoise. All aboard!
About the Author
Paul Larson is an equities strategist with Morningstar and editor of
Morningstar StockInvestor, which seeks to purchase shares of quality companies at a discount to their intrinsic values.
StockInvestor features
two market-beating portfolios: the Tortoise and the Hare. Paul joined Morningstar in 2002, and he was the lead writer and editor for Morningstar's
educational series of stock-investing books.
