Berkshire Buys American

This morning,  Berkshire announced it will be buying  Burlington Northern Sante Fe 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! 

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