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Buffett's biggest bet yet: $44B on railroad

WASHINGTON — Berkshire Hathaway chairman and world's second-richest man Warren Buffett said Tuesday that his $34 billion purchase of Burlington Northern Sante Fe Railway is a bet on America's future.

It's a bet, but not just on America. With the purchase, which includes the assumption of $10 billion in debt, Buffett is also betting on China's rebound and growth, the price of oil going back up, the continued use of coal to make electricity and a higher profile for the nation's railroads, thanks to a push from the White House.

Buffett, whose investing decisions are carefully scrutinized by the world of finance, said: "It's an all-in wager on the economic future of the United States."

Buffett already owned 22 percent of the Western U.S. railroad giant; Tuesday's deal would give him the entire railroad, the second-largest of the nation's six major lines. It marked the biggest deal to date for Buffett, who also owns or has large stakes in Coca-Cola, Dairy Queen, Wrigley, Geico and several other companies. (He trails only Bill Gates in wealth.)

For Buffett, the deal is also the fulfillment of a dream denied in childhood. "This is all happening because my father didn't buy me a train set as a kid," he joked.

Buffett began buying into Burlington Northern (BNSF) in 2007. His accumulation of BNSF shares coincided with the resurgence of America's moribund freight rail industry. In the 1970s and '80s, traffic had dropped so much that companies actually tore up unused tracks, as manufacturers switched their shipping to cheaper 18-wheelers. But as fuel prices soared and U.S. demand for Chinese imports surged, railroads experienced a rebirth.

But railroad stocks peaked in summer 2008, when oil hit its high of $147 per barrel. As the recession kicked in, the amount of goods being shipped was greatly reduced, hurting the railroads. To help the industry, the federal government set aside $48 billion of the $787 billion stimulus for infrastructure improvement, some of which goes to railroads. BNSF's cut of stimulus money is $28.7 million, for a bridge between Iowa and Illinois.

Given the up-and-down nature of the railroad industry, why is Buffett plowing $44 billion into it?

"Our country's future prosperity depends on its having an efficient and well-maintained rail system," Buffett said in a release.

The 79-year-old Buffett invests for the long-term; meaning, for decades after his death.

"Buffett is making an elephant-sized bet on three things here and all are related," said Art Hogan, Jefferies managing director. "He thinks the economy in the U.S. is getting better and will continue. He believes that energy prices will continue to rise and that trains will be more productive than trucks in that environment, and third, and most important, he sees Burlington Northern as cheap with a longer-term investment time horizon."

Miller Tabak equity strategist Peter Boockvar said: "He's betting on global population growth and global wealth increasing, thus raising the world's purchasing power to buy stuff that the U.S. makes, and also a bet that we will still import stuff that the rest of the world makes."

Buffett, an early supporter of President Barack Obama, also is betting on the administration's promises to shore up the nation's infrastructure and support railroads as a way of taking trucks off the road. Also, the White House supports "clean-coal" technology, signaling a prominent place for coal in the nation's energy future.

Information from the Washington Post, Associated Press and New York Times was used in this report.

Warren Buffett

Age: 79

The deal: Together, it's worth $44 billion. Buffett's Berkshire Hathaway agreed to buy railroad operator Burlington Northern Santa Fe Corp. for $34 billion, or $100 a share. It already owns more than a fifth of the railroad operator, so the cost is roughly $26 billion, which will be paid for with about 60 percent in cash and 40 percent in Berkshire shares. Berkshire also is taking on about $10 billion of Burlington debt.

It will make freight railroads Berkshire's third-largest industry after insurance and utilities.

The railroad offers: 30,000 miles of track that cross the lower 48 states. The company hauled 297 million tons of coal last year, enough to produce more than 10 percent of the nation's total electricity.

Berkshire's recent big transactions: Investing $6.5 billion in equities related to Mars Inc.'s acquisition of Wm. Wrigley Jr. Co., $5 billion in preferred shares of Goldman Sachs Group Inc., $3 billion in General Electric Co., and $2.6 billion in Swiss Reinsurance Co.

Over the years: Buffett's company has bought more than 60 subsidiaries; including clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co. Berkshire's biggest acquisition before BNSF was the $16 billion stock purchase of reinsurance giant General Re announced in 1998.

Other assets: Berkshire owns major utilities through its MidAmerican that rely on coal that moves by rail. Berkshire also owns Acme Brick, Shaw carpet and other manufacturing companies that need to ship products, and it owns major furniture retailers, like Nebraska Furniture Mart, that buy many imported products to sell.

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Buffett's biggest bet yet: $44B on railroad 11/03/09 [Last modified: Tuesday, November 3, 2009 10:22pm]
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