Yesterday, rail industry constituents and observers were abuzz about billionaire Warren Buffet’s proposal to buyout Burlington Northern Santa Fe Corp. to the tune of $44 billion. In what would amount to the largest-ever deal for Buffet’s Berkshire Hathaway Inc., the firm would pay $100 per share, or about $34 billion, for all of BNSF’s outstanding stock (totaling 77.4 percent of all shares) and cover $10 billion of the railroad’s outstanding debt.BNSF’s main western competitor, which typically tends to remain mum on issues affecting other Class Is, even issued a statement on the deal.“We view Berkshire Hathaway's decision to purchase all of the outstanding shares of BNSF Railway as a tremendous vote of confidence in the future of America's freight-rail industry,” Union Pacific Railroad officials said. “A healthy, growing railroad industry is good for our investors, our customers, our employees and our economy.”Berkshire Hathaway investors had something to say, too. Tom Russo, a partner at Gardner Russo & Gardner, believes the deal is another example of “Warren being Warren” by taking advantage of a soft market when the “possibility for competitive bids is relatively low.”“He looks at this as a business that has advantages against other forms of transportation,” said Russo.The buyout is a “pretty simple bet” on an industry Buffet knows quite well, said Mario Gabelli, CEO of Berkshire Hathaway investor Gamco Investors Inc.“He’s been involved in basic businesses like this for years,” said Gabelli.Meanwhile, Larry Bonderud — the mayor of Shelby, Mont., and a BNSF stockholder — believes the deal exemplifies the railroad’s value in the nationwide transportation network.“Warren Buffett is a miracle guy, most things he touches do a lot better,” he said. “I think this is good. You've got stock increasing to a higher value, so the company should be able to do more improvement to infrastructure and add more jobs.”But some grain growers in Bonderud’s state are concerned about the buyout’s potential effect on BNSF’s grain rates.“Montana’s farmers have been in a captive shipper situation for years, with BNSF controlling more than 90 percent of the rail miles in Montana,” said Montana Farmers Union President Alan Merrill. “This purchase will not diminish that market dominance or its detrimental effect on Montana's farmers. In fact, the purchase could lead to more consolidation and concentration of the rail industry.”Among the analyst crowd that commented on the deal, Tony Hatch said Buffett is buying into the “rail renaissance.”“People now view rail as a part of our efficiency infrastructure and carbon solution,” said Hatch, an independent analyst and Progressive Railroading columnist. “Just a few years ago, rail was thought to be a waste of time.”Keith Schoonmaker, an analyst with Morningstar, believes the buyout shows Buffett has confidence that the U.S. economy will bounce back in the long term.“It’s an investment that looks toward the next decade, not the next quarter,” he said.Buffet himself talked about the deal yesterday, as well, while appearing on various TV news programs. “This is all happening because my father didn’t buy me a train set as a kid,” he joked.On a more serious note, Buffet said the “all-in bet” on BNSF was an easy one to make given the rail industry’s upside when the economy strengthens. However, the deal “stretched” Berkshire Hathaway’s finances.“I went to the last nickel,” said Buffet. “But from my standpoint, it’s a lot easier to make a $32 billion investment than 10 $3 billion investments.”BNSF Chairman, President and CEO Matt Rose and EVP/CFO Tom Hund discussed the deal, too, during a Webcast held Tuesday morning.“I've gotten to know Warren and admire his leadership philosophy. His investment in BNSF provides a solid foundation that will allow us to focus on the future needs of our railroad, our customers and the U.S. transportation infrastructure,” said Rose. “Berkshire Hathaway, of course, is one of the most admired companies in the world. It's known for its strong management and focus on shareholder value.”BNSF anticipates that the “only material regulatory filings and approvals” required for the deal are a filing under the Hart-Scott Rodino Antitrust Improvement Act at the U.S. Department of Justice, as well as other appropriate governmental reviews and approvals, said Hund. The Class I and Berkshire Hathaway expect to close the deal in first-quarter 2010.“With respect to the Surface Transportation Board, the law requires the STB to review and approve mergers between two railroads, or when a railroad is purchased by an entity that owns or controls another railroad. This is not a merger of railroads and Berkshire Hathaway does not control any other railroads,” said Hund. “Under established precedent, the STB merger review regulations and process would not apply to a change in shareholder ownership, which does not involve another railroad. After the transaction is complete, the STB’s established economic regulatory standards and procedures would continue to apply to BNSF.”
I was about to ask if this wasn't the new elephant in the living room here, it was so quiet.
So, think this will wind up going fully private in the end, or just wind up with BH having a full controlling interest and a higher share price? (Aside from the very real SEC and IRS constraints, a run at it, with a share price run up, and then partial sell-off could really be the best thing all around, although it doesn't do anything for the debt load.
I think the deal will go through. DOJ is the only government approval necessary and as long as BH sells its UP and NS holdings, it doesn't appear to conflict with DOJ merger guidelines. I'm unaware of any IRS or SEC involvement, much less constraints.
I am amused that it took only a day before the Montana grain interests started their whining and complaining. Yes, BNSF has 90% of the track mileage in Montana, but captivity is more than just being limited to one railroad. When the ocean freight rate differential causes export grain to flow to the Gulf of Mexico ports, Montana growers don't give two seconds worth of thought to BNSF as they load up their trucks to overweight and haul grain to Missouri River transload terminals. Sometimes, they even haul their grain to Columbia River terminals for export from the PNW, again not worrying about BNSF. They're really, really good at two things: growing prodicious amounts of grain and whining a lot about big, bad BNSF. Oh, well, it gives them something to do when the harvest is in and before they take off for their winter vacations in warmer places than Montana.
LK>"I think the deal will go through. DOJ is the only government approval necessary and as long as BH sells its UP and NS holdings, it doesn't appear to conflict with DOJ merger guidelines. I'm unaware of any IRS or SEC involvement, much less constraints."
The SEC sometimes takes a dim view at running at a stock for a quick capital gain if you already have a substantial interest in it. (Although I can't see BH involving itself in that kind of pump-and-dump, some legitimate takeover attempts have had just that effect, where a hostile buyer made out rather nicely on the price runup his actions caused.) The IRS? I have my doubts that the low short term capital gains tax is going to remain unchallenged, although it's getting a little late for any TY 2010 changes. Either way, that'd be after the fact.
The reason I think remaining public might be a good thing: stock ownership is one of the safety valves for the railroad's relations with much of their own workforce, and with a great many of their more -I dunno, "vocal" might be a polite word for it- customers. It's harder to piss and moan about the nasty mean rail octopus if you are an octopus stock owner, and this effects a surprising number of people and institutions.
LK>"I am amused that it took only a day before the Montana grain interests started their whining and complaining."
Well, a fella does have to sleep sometimes.
Anmccaff: The SEC sometimes takes a dim view at running at a stock for a quick capital gain if you already have a substantial interest in it. (Although I can't see BH involving itself in that kind of pump-and-dump, some legitimate takeover attempts have had just that effect, where a hostile buyer made out rather nicely on the price runup his actions caused.) The IRS? I have my doubts that the low short term capital gains tax is going to remain unchallenged, although it's
getting a little late for any TY 2010 changes. Either way,
that'd be after the fact.
Again, I say I don't see a bogeyman in this one, although I think Buffett is getting BNSF at a bargain price. There's nothing hostile about this, and Buffett's track record is that he only does friendly deals. As for low short term capital gains taxes, that would apply, if I understand you correctly, to BNI investors who acquired BNI before the deal was announced and within the window for short term tax treatment. Berkshire Hathaway certainly isn't playing any short term games; it has held BNSF since 2006 and is plunking down a lot of real money.
Anmccaff: The reason I think remaining public might be a good thing: stock ownership is one of the safety valves for the railroad's relations with much of their own workforce, and with a great many of their more -I dunno, "vocal" might be a polite word for it- customers. It's harder to piss and moan about the nasty mean rail octopus if you are an octopus stock owner, and this effects a surprising number of people and institutions.
Let's take this paragraph point by point. Railroads deal in very long-lived assets, and they do it in a world that is governed by the quarterly earnings call (in which we get to listen to numerous 'analysts' asking the same question over and over). Under private ownership, the management is free to plan capital budgets to match their assessment of traffic and revenue. I might even suggest that any railroad would be better off under private ownership. As for a safety valve, I don't really think it's necessary. Rail labor does what rail labor thinks it must, and the corporate ownership structure really has little or no bearing on labor demands or negotiations. Customers? Same thing. I've never known a shipper to change his view of his serving railroad based on who owns it. Tim Mellon owns Pan Am Ry.; it hasn't changed anyone's attitude toward Pan Am Ry.
LK>"Again, I say I don't see a bogeyman in this one, although I think Buffett is getting BNSF at a bargain price. "
Agreed. Also agreed that BH and WB are a class act; the only mistake Buffett ever made, in my opinion, was thinking he was Harry Alfond.
I agree that Buffett is a long term thinker, and certainly a man who can attract cheaper capital, which ccould make a lot of those neat ideas we see tossed around here from time to time feasible.
On the other hand, railroads also require a good deal of political good will, and that's easier to get when outsiders have a direct stake in your success, since they own a piece of your stock. For one obvious example, how far will California twist the railroads' arms if it has a great deal of CalPers tied up in Cattelus?
Larry....I would love to be a fly on the wall when Buffet and Bill Gates (CN's largest shareholder - I believe) get together for a game of bridge.
Buffet has no history of Gordon Gecko so this deal should not be looked on as if its just to pump and dump.
Actaully WB's only big mistake, self admitted too, was his purchase of ConocoPhillips at its peak and watching "several billion dollar" lost.
Was doing some research on WB and came across some comments that if you want to know what type of manager/investor he is read his letters to shareholders. These are posted from as far back as the 70's on BH website and after reading a few it is for certain that he is cut from a different cloth than any executive.
Horsman: I hadn't thought of Gates, but you raise an interesting point. Three spades? In my bridge-playing days I frequently was admonished not to make my bid sound like I was asking a question. Old habits die hard.
Closer cooperation? I would expect both CN and BNSF to behave at all times in their perceived self-interest.
Some people are wondering if Warren will make a move toward high speed passenger rail (186 mph and up). Dallas/Fort Worth-Houston or Chicago/ Kansas City are possibilities. This could be the SPARK that ignites a whole new era n passenger transportation in the U.S. It about time!
Do not let your enthusiasm cloud your judgement - good advice in most of life and especially so of railroading.
Buffett has a superb track record as a long term investor. He also has an equally superb track record of not throwing his money away on "fliers." As no one yet has demonstrated how HSR ever is going to be profitable (defined as producing a return on investment at levels that allow it to sustain itself) I would be extremely surprised if he were to plunk Berkshire Hathaway cash on any HSR or convention passenger investment. Sanity in high speed rail advocacy is to be desired. It's about time!
There is no way Buffett would invest in HSR not having a model that shows a significant long term ROI for his investors.
And he seems to have little if any history with being a guinea pig.
Way to go Warren ! I wish I had 44billion for a railroad.
I think you rail experts are all missing the big story. Buffett is reading the tea leaves that say we are at or near Peak Oil( look it up). Railroads have an unbeatable edge in terms of energy competitiveness for moving stuff.
Buffett also owns something called Mid America - wind turbine farm developers. What do you get if you cross the 2? Electrified right of way using federal grid refurbishment dollars that will channel wind energy from the desolate but windy great plains to population centers. I love a 2-fer, and this is the ultimate one!
Perhaps. I believe some of you are being carried away by your enthusiasms and are engaging more in wishful thinking than in real analysis.
Perhaps Buffett will do what some say he will do. I don't think so. He has a long track record of being an investor in going concern, successful businesses, not an operator of those businesses. If there is a synergy that benefits both BNSF and MidAmerica, it won't be at all surprising to see them capitalize on that synergy. They don't need common ownership for that, however. My opinion is worth approximately what you're paying for it (which was $0 the last time I checked my bank statement), but it ought to suffice that rail's time is coming around again. The infrastructure problems still exist and the federal government isn't likely to really fix them. Diesel fuel is not likely ever again to be cheap. These factors and others say rail will benefit going forward. Isn't that enough for the Oracle of Omaha? I think it is. And apparently his investment says he thinks it is, too.
Larry, it's very much about the synergy combined with a slick application for public grid refurbishment assistance. Stand alone does not produce the longer term commitments that are needed to justfy the huge investment. Buffett's no dummy and the formual I see is they find really solid ( with conventional thought)opportunities then add in the extra and creative revenue stream that no one else thinks about.. I think that might be where Buffet is here- otherwise why pay a 33 pct premium for the stock price in what is still a weak economy?