3rd UPDATE:Buffett Bets On US Economy With Burlington Northern

OF DOW JONES NEWSWIRES

Berkshire Hathaway Inc. (BRKA, BRKB) announced plans Tuesday to acquire the 77.4% of Burlington Northern Santa Fe Corp. (BNI) it doesn't already own in a deal that values the railroad operator at $34 billion, plus $10 billion in debt.

The deal, priced at a 31.5% premium to Burlington's most-recent close, would mark Berkshire chief Warren Buffett's largest acquisition, boosting his minority stake in the second-largest U.S. railroad by revenue in what he termed an "all- in wager" on the U.S. economic recovery.

Berkshire Hathaway, which already owns 22.6% of Burlington Northern, is placing the bet at the tail end of a five-year "rail renaissance" that saw rail volume and pricing soar, only to have the recession cut deeply into traffic and profitability.

Burlington Northern, a major carrier of coal, agricultural products and consumer goods with 32,000 miles of track in 28 states and Canada, gave little indication in its quarterly report two weeks ago that it expects a rebound any time soon, even as some other top railroads predicted the worst of the downturn at least appears to be over.

Burlington forecast fourth-quarter results well below Wall Street expectations, saying only that volumes were trending "similar" to the third quarter's 18% slide.

Burlington and the other top railroads, including Union Pacific Corp. (UNP), CSX Corp. (CSX) and Norfolk Southern Corp. (NSC), are considered barometers of overall economic activity because of the breadth of goods they ship.

Buffett has said in the past that he uses weekly railroad carload data by railroads as a proxy for the health of the economy.

Burlington Northern has seen its big coal market hit hard in particular by the recession-driven downturn in overall freight volumes. Demand has slid for coal used in steel production as well as for coal used in electricity generation due to low natural gas prices.

But Longbow Research analyst Lee Klaskow said the railroad has "fantastic franchises" in coal and agricultural products that will rebound once the economy turns a corner.

The company also is viewed as one of the best-managed U.S. railroads.

"In the long term, it will probably be a great deal for Berkshire Hathaway," Klaskow said.

Railroad operators have used the economic slump to substantially boost efficiency, but future investment in the sector also hinges on a slew of tax credits and other measures being pushed in Congress by industry executives.

Regardless, Buffett called his bid "a huge bet" on Burlington Northern, its management team and the rail industry, as well as "an all-in wager on the economic future" of the U.S.

"I love those bets," he said.

The proposed deal values Fort Worth, Texas-based Burlington Northern at $100 a share. BNI shares recently were trading up 28% at $97.59. The deal also includes $10 billion of outstanding Burlington Northern debt.

The deal would allow shareholders to elect to convert their stock into the right to receive either a cash payment of $100 or a variable number of Berkshire's Class A or Class B shares.

The transaction is expected to close in the first quarter.

Separately, Berkshire's board approved a 50-for-1 split of its Class B stock. The company said a great majority of the stock issued by Berkshire in the acquisition would be its A shares, but B shares also will be needed to accommodate holders of smaller amounts of Burlington Northern's shares who opt for a share of exchange rather than a cash payment.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

(Doug Cameron and Bob Sechler contributed to this article)

  (END) Dow Jones Newswires
  11-03-091144ET
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