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JakilaTheHun (99.94)

Berkshire Hathaway Acquires Burlington Northern Santa Fee for $100/share

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November 03, 2009 – Comments (3) | RELATED TICKERS: BNI.DL , BRK-A , CSX

I might not normally think that a merger like this was that big of a deal, but I think it says a lot that one of the world's most prudent investors is making an "all-in" bets on the future prospects for US rail:

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"Berkshire Hathaway to Acquire Burlington Northern Santa Fe for $100 Per Share in Cash and Stock"

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FORT WORTH, Texas & OMAHA, Neb.--(BUSINESS WIRE)--The boards of directors of Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) and Burlington Northern Santa Fe Corporation (BNSF; NYSE: BNI) today announced a definitive agreement for Berkshire Hathaway to acquire for $100 per share in cash and stock the remaining 77.4 percent of outstanding BNI shares not currently owned to increase its holdings to 100 percent. Based on the number of outstanding BNI shares (including shares currently owned by Berkshire) on Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt, making it the largest acquisition in Berkshire Hathaway history.

“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.”

“We are thrilled to have the opportunity to become a part of the Berkshire Hathaway family,” said Matthew K. Rose, Burlington Northern Santa Fe chairman, president and chief executive officer. “We admire Warren’s leadership philosophy supporting long-term investment that will allow BNSF to focus on future needs of our railroad, our customers and the U.S. transportation infrastructure. This transaction offers compelling value to our shareholders and is in the best interests of all of our constituents including our customers and employees.”

Terms of the Transaction

The definitive agreement provides that each share of BNI common stock will at the election of the shareholder be converted into the right to receive either (i) a cash payment of $100.00 or (ii) a variable number of shares of Berkshire Hathaway Class A or Class B common stock, subject to proration if the elections do not equal approximately 60 percent in cash and 40 percent in stock. The stock component of the consideration is subject to a “collar” whereby the value of each Berkshire Hathaway share received is fixed at $100.00 if the price of Berkshire Hathaway Class A stock at closing is between approximately $80,000.00 and approximately $125,000.00 per share. If the value of Berkshire Hathaway Class A stock is outside of this collar range at closing, then the number of shares received of Berkshire Hathaway Class A stock will be fixed at either 0.001253489 per BNI share for values below the collar range, or 0.000802233 per BNI share for values above the collar range. The shareholder may receive Class A or, in lieu of fractional Class A shares, equivalent economic value of Class B Berkshire Hathaway shares, subject to certain limitations as described in the definitive agreement.

The transaction requires approval by holders of two-thirds of BNI’s outstanding shares (other than shares held by Berkshire Hathaway), and customary closing conditions, including Department of Justice review. Closing is expected to occur during the first quarter of 2010.

BNSF Railway Company will continue to focus on providing outstanding service to its customers from its Fort Worth, TX headquarters. Included in the transaction are all assets and subsidiaries of BNSF.

 

3 Comments – Post Your Own

#1) On November 03, 2009 at 8:48 AM, checklist34 (99.73) wrote:

does this seem Buffetesque?  paid near the all time high share price for a company?

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#2) On November 03, 2009 at 8:59 AM, russiangambit (29.51) wrote:

Wierd. Unless, he realy thinks rail will have a big future in the US as a more green than trucks? Is it, in a way, a bet on green technology or peak oil?

Still strange for Buffet to go and outright buy a huge company like that.

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#3) On November 03, 2009 at 9:17 AM, JakilaTheHun (99.94) wrote:

Wierd. Unless, he realy thinks rail will have a big future in the US as a more green than trucks? Is it, in a way, a bet on green technology or peak oil?

Admittedly, I do wonder why he didn't dive in on this fully back when it was trading under $60.  However, I don't think $100/share is an unreasonable price tag, either. 

Higher oil prices and greater environmental awareness are part of the reason why railroads stand to benefit in the next couple of decades.  What is less often mentioned is the affect of the US fiscal crisis, particularly on the state level.  The states and the Feds have drifted away from the original funding design for the highway system, and the system is dramatically underfunded right now.  Essentially, it's being heavily subsidized by governments, but they might not be able to continue this practice.  

Once these stealth subsidies are weakened, trucking is going to become more expensive.  In fact, it's completely possible that more tolls are enacted that specifically hit trucks, which happen to put the most excessive wear and tear on the system , and are the biggest beneficiaries of these subsidies. 

For all these reasons, I have advocated going long on the freight railroads (BNI, CSX, NSC) and going short on trucking as a hedge (e.g. JBHT).  Rail stands to benefit significantly over the next few decades in the US.

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