A Burlington Northern Santa Fe Railroad locomotive sits on the track as workers stand nearby in Seattle.Kevin P. Casey
Warren Buffett's bold move to snap up Burlington Northern Santa Fe Corp. , a railway with tracks running through his hometown of Omaha, shines a new light on an industry that he believes is poised to ride an economic rebound.
Placing a huge bet that the U.S. slump is over, Mr. Buffett said that "an efficient and well-maintained rail system" will play a starring role in future prosperity. Through holding company Berkshire Hathaway Inc. , the billionaire plans to acquire full control of BNSF in a blockbuster deal that values the railway at $34-billion (U.S.).
"America must grow and prosper for railroads to do well," Mr. Buffett said in a statement announcing that Berkshire, which owns 22.6 per cent of BNSF, is offering to buy the rest of the railway for $26.3-billion. "Most important of all, it's an all-in wager on the economic future of the United States."
North America's largest railways have been hurt by overcapacity during the downturn. Their carloads fell more than 18 per cent in the first nine months of this year compared with the same period in 2008, amid one of the deepest and longest U.S. economic downturns of the postwar era. Shipments of autos slid 37 per cent, lumber decreased 32 per cent because of a moribund home building sector, and container traffic slumped 12 per cent.
Despite those numbers, Mr. Buffett and other well-known investors have placed big money on railways in the belief that they will be major beneficiaries of Asian demand for coal and other key commodities from North America. BNSF has invested heavily in hauling coal from Wyoming's Powder River basin, where production is forecast to double over the next 25 years, Edward Jones analyst Daniel Ortwerth said in a report.
The rail sector has another potential ally: higher fuel prices, which hurt the profits of all transportation companies but are more detrimental to truckers than railways.
"One train regularly hauls 100 or more containers, while a truck can haul one at a time," Mr. Ortwerth noted.
Shares in other carriers rallied Tuesday, including Canadian National Railway Co. and Canadian Pacific Railway Ltd., which have extensive tracks into the United States. But Berkshire's move is not expected to change the environment for large railway mergers in the United States, which have been in a deep-freeze.
BNSF and CN tried to merge a decade ago, but abandoned the effort in 2000 because of U.S. regulatory concerns. BNSF said it doesn't anticipate major hurdles in Berkshire Hathaway's cash-and-stock bid of $100 for each BNSF share.
In a recent interview, CN chief executive officer Hunter Harrison said major mergers are likely another decade away, so in the meantime, freight carriers will have to make do with co-operation pacts to share certain stretches of track on a limited basis - deals that can take years to reach.
"There's not going to be any more railroads built. It's not going to happen. You have to take the infrastructure that you have today and use it more effectively," Mr. Harrison said.
"CN could merge with any railroad in the U.S. and it would make some sense. We interchange with all of them."
Mr. Buffett's occasional bridge partner, Microsoft Corp. chairman and fellow billionaire Bill Gates, is CN's largest shareholder, with a stake of more than 7 per cent through Cascade Investment LLC. Mr. Gates and his wife, Melinda, also own almost 2 per cent of CN through the charitable Bill & Melinda Gates Foundation.
Having two of the world's richest men on board as big fans of the rail sector shows where the "smart money" is, RBC Dominion Securities analyst Walter Spracklin said. "It reinforces the view that this is an industry with strong long-term fundamentals. It's a shot in the arm for valuations."
Some observers said the move looked like a classic Buffett investment, because railways in North America have high barriers to competition. But not every Berkshire shareholder was impressed. Christopher Bloomstran, a St. Louis-based money manager who has about 20 per cent of the $150-million his firm manages in Berkshire Hathaway stock, said he spent Tuesday fielding calls from like-minded managers who were scratching their heads over this and other recent Berkshire deals.
"He's buying industrial businesses with mediocre returns on capital and paying premiums on them," Mr. Bloomstran said, noting the Burlington Northern deal values the company at 2.5 times its peak sales of $18-billion.
"For 20 years, it's been an industry that's never earned its capex (capital expenditures) and never been a high return-on-capital industry."
With files from reporter David Milstead
BURLINGTON NORTHERN (BNI)
Close: $97 (U.S.), up $20.93