Buffett's $34bn rail bet on western coal's future and on U.S. economy

Will Berkshire Hathaway's $34bn investment in Burlington Northern Santa Fe make Warren Buffett the modern day railroad baron of western coal?

RENO, NV - 

Warren Buffett's $34 billion bet on the future of the U.S. economy puts Berkshire Hathaway in charge of the U.S's biggest shipments of cleaner, western coal to major utilities including its own MidAmerican Energy Holdings.

Burlington Northern Santa Fe (BNSF), which hauls enough coal to power one out of every 10 U.S. homes, has become Berkshire Hathaway's largest acquisition.  The railway controls the critical rail lines linking coal from the Powder River Basin, the Northern Great Plains, the Western Interior Basin and the Illinois Basin to the major utility companies of southern California.

Jack Albin, chief investment officer at the Harris Private Bank in Chicago, told Reuters, "Buffet is trying to get into coal but doing it in a cheaper way."

"It's leveraged against coal's demand without actually having to buy the commodity itself," he said.

Buffett already owns 22% of the nation's second largest railroad and is now spending $34 billion in cash and stock in order to buy up all of Burlington Northern Santa Fe. He will also assume about $10 billion of the railroad's debt. Berkshire will pay $16 billion in cash and the rest in stock.

In a news release Tuesday, Buffet said, "Berkshire's $34 billion investment is 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," he said. "I love these bets." Buffett already has holdings in the Union Pacific Railway (1.9% stake) and a 0.5% stake in the Norfolk Southern.

It should be noted that imports of coal to China are up 20% year to year. Burlington Northern ships the coal to through western U.S. ports. Coal shipments accounted for half the tonnage moved by Burlington Northern in this first nine months of this year.  BNSF also is a key shipper of Asian products into the U.S. Interior.

In addition to the deal, Buffet announced Berkshire Hathway's board has approved a 50-for-1 split of its Class B common stock. The great majority of stock issued by Berkshire in the railroad acquisition announced Tuesday will be "A" shares. "B" shares will be needed to accommodate holders of smaller amounts of BNSF shares who opt for a share exchange rather than a cash payment.

"By splitting Berkshire ‘B' shares 50-for-1, we can accommodate even the smallest holding of BNSF shares that elect a tax-free exchange," the company said. Berkshire has agreed to purchase the railroad shares for $100 a share.

The Class B shares trade at over $3,000 while the Class A shares trade at more than $100,000.

Over the years Berkshire has acquired more than 60 subsidiaries and has major holdings in Coca-Cola and Wells Fargo. The company's biggest acquisition before BNSF was the $16 billion stock purchase of General Reinsurance Corporation in 1998.

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Buffet's investment in BNSF---the elephant in the room..... What most people don't know is that Buffet just picked up a huge play in oil transportation---and at very cheap prices. There are thousands of railroad tank cars that have been built to haul ethanol from the upper Midwest to markets that have not . .more materialized. But most people don't realize that the HUGE sweet-oil play in N. Dakota, Montana and Saskatchewan doesn't have pipelines to move the stuff---hence BNSF is sitting on this play with rail lines and tank cars already in place......... Think "unit trains." . .less by Ed Ely on November 11 2009, 18:03 Find this comment inappropriate? Report it

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