Buffett Bids for BNSF Corp.

This story appears in the Nov. 9 print edition of Transport Topics.

Investor Warren Buffett made a dramatic bid to buy the Burlington Northern Santa Fe Corp., the largest U.S. railroad, in a move valued at $44 billion and intended to capitalize on future economic growth and intermodal’s potential.

His Berkshire Hathaway Corp.’s offer on Nov. 3 represented the largest purchase ever by the storied investor, who termed the move “an all-in wager on the economic future of the United States” in a statement announcing the plan. The plan faces a Justice Department review following release of details later this month in a proxy statement.

Intermodal freight shipments represented 45% of the loads and 31% of BNSF’s 2008 revenue, which totaled $18.02 billion. BNSF handled 4.67 million intermodal loads last year, down from the record total of 5.34 million two years before, when Asian imports were surging.

“This will probably make managing the BNSF easier because they do not have worry about their stock price,” said Bob Curry, president of drayage fleet California Cartage, Long Beach, Calif. “They only have to please Buffett, and that should be easy as long as they show a steady growth curve.”

“Intermodal is the only ‘growth commodity’ on the rails,” Robert W. Baird analyst Jon Langenfeld said in a report, citing a 6.5% increase during the last cyclical economic recovery from 2002 through 2006, and BNSF’s industry-leading growth rate of 10% during that period.

Langenfeld said that he expects intermodal volume will more than double the increases in gross domestic product when economic growth accelerates. That faster pace will result from renewed international trade activity and the railroad’s ability to capture more longhaul truck/rail freight, he said.

“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” Buffett said when the deal was announced.

He termed the offer, whose total price includes $10 billion in assumed debt, “a huge bet on that company, CEO Matt Rose and his team, and the railroad industry.”

The acquisition “clearly is a significant vote of confidence in intermodal,” said rail analyst Tony Hatch. He noted that BNSF is the “most global” of the U.S. railroads because it carries more international ocean freight than any other carrier. Last year, international intermodal was 2.54 million, or 54% of total volume.

Domestic intermodal accounted for 2.13 million loads last year, about the same as 2006.

The acquisition is catching truckers’ attention now when competition is fierce because motor carriers and railroads compete for some domestic freight, said Dahlman Rose analyst Jason Seidl.

“Truckload pricing is completely unsustainable over the long run,” he said. “In the near term, Burlington Northern is exposed because of that [truckload] pricing.”

Anecdotal comments from fleets indicate a year-to-year drop of about 10% in truckload rates. The railroad’s domestic intermodal revenue per load has dropped 16% in the same period.

Berkshire’s offer is 60% cash, raised in part from a stock split, and the remaining 40% in shares. BNSF shareholders are expected to vote on the plan in the first quarter of 2010 and two-thirds approval will be needed from holders other than Berkshire.

At the $100 a share offer price, Buffett’s current BNSF holdings are worth $7.7 billion, and he will have to spend $26 billion to buy the rest of the stock.

A Justice Department review of antitrust issues will be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. But the Surface Transportation Board won’t have to rule on the plan because one railroad isn’t buying another.

Buying BNSF widens Berkshire Hathaway’s little-noticed but diverse transport portfolio.

Wall Street analysts also viewed the purchase as a sign that Senate legislation regarding rail competition won’t hurt rail profits or pricing.

Sen. Jay Rockefeller (D-W.Va.), chairman of the Commerce Committee, has said he supports changes in the rules covering competition, but has not yet introduced a bill.

“To make such a large investment, Berkshire must also believe regulatory concerns are unlikely to impact rail economics,” Morgan Stanley’s William Greene said.

“Berkshire likely felt comfortable with the regulatory risk to acquire BNSF,” analyst Ed Wolfe said.

One reason for that view, Hatch explained, was the favorable perception of Buffett among Washington officials who remember how he invested in companies such as Goldman Sachs and General Electric last year to help boost confidence in financial markets.

Analysts said they didn’t expect investors to buy other railroads or a competing bidder for BNSF to emerge.

“Buffett is not one to buy a company and shake up management and its strategies,” Seidl said. “He doesn’t normally have that game plan.”

That sets Buffett apart from investor Philip Anschutz, who was the last investor to buy a major railroad, in 1984, and was an activist in managing the Southern Pacific Railroad, Hatch said. Among the steps Anschutz took was replacing management in a bid to boost results.

Anschutz first bought Rio Grande Industries, a rail holding company, and later acquired the struggling SP. It in turn was eventually bought by Union Pacific, which is based like Berkshire, in Omaha, Neb., and is the second-biggest U.S. railroad.

All major transactions since then have been mergers and acquisitions within the rail industry. Buffett’s purchase price is more than twice the previous record for a rail purchase, which was $10.2 billion when Norfolk Southern Corp. and CSX Corp. bought Conrail Inc. in 1997.