NEW YORK – The biggest name in investing is making what he calls an “all-in wager” on the U.S. economy – $34 billion to own a railroad that hauls everything from corn to cars across the country.
The acquisition of Burlington Northern Santa Fe, the nation’s second-largest railroad, would be the biggest ever for Warren Buffett’s Berkshire Hathaway investment company.
It’s a natural fit for the Oracle of Omaha, a city with a special place in railroad history. It was the starting point for the westward push of the transcontinental railroad. Today, Omaha is the headquarters of Union Pacific, and BNSF trains rumble through every day.
In a statement, Buffett, whose investing decisions are carefully scrutinized by the world of finance, voiced confidence in the railroad industry.
“Most important of all, however, it’s an all-in wager on the economic future of the United States. I love these bets,” he said Tuesday.
Berkshire Hathaway Inc. already owns a 22 percent stake in Burlington Northern and would buy up the rest under the deal, for a total value of $34 billion. It still needs approval from Burlington shareholders and antitrust regulators, both expected early next year.
Burlington Northern is the biggest hauler of corn and coal for electricity, making it an indicator of the country’s economic health. It also carries everyday items such as refrigerators, clothing and TVs from Western ports like Los Angeles and Seattle.
Berkshire will pay $100 a share in cash and stock for the rest of the company, more than a 30 percent premium on the Monday closing price of Burlington Northern shares. Shareholders will have the option of a $100 cash payment per share or common stock in Berkshire.
Burlington Northern Santa Fe Corp. stock shot up $20.93, or 27 percent, to $97 on Tuesday.
Stock in other rail companies rose as well. Berkshire owns a 2 percent stake in Union Pacific’s stock and a less-than-1 percent stake in Norfolk Southern.
Buffett has said he realized a few years late that railroads were an appealing investment. As diesel prices rise, shipping by rail instead of truck becomes more attractive, and it would be extremely difficult for a competitor to build a new railroad.
“They do it in a cost-effective way and extraordinarily environmentally friendly way,” Buffett told CNBC on Tuesday. “I basically believe this country will prosper and you’ll have more people moving more goods 10 and 20 and 30 years from now, and the rails should benefit. It’s a bet on the country, basically.”
Burlington Northern made about 31 percent of its money last quarter from shipments of consumer products from the West to major hubs like St. Louis, Kansas City and Chicago.
Its next most important segment was coal, followed by industrial products like farm equipment, lumber and chemicals. It also hauls corn, wheat and soybeans, much of it exported to China. Burlington Northern serves more of the nation’s major grain-producing regions than any other railroad.
Burlington Northern also hauls trains full of retail merchandise imported from Asia and imported cars from manufacturers like Toyota and Honda.
Burlington itself, however, is among the least optimistic of the major railroads about the pace of economic recovery. Last week it said third-quarter profit dropped 30 percent from a year earlier; people resisted buying retail goods and industrial production struggled.
The billionaire is “buying at the trough – things aren’t going to get much worse. He’s getting in at a good time,” said Art Hatfield, an analyst with investment firm Morgan Keegan.
Hatfield said he believes Buffett went for Burlington Northern in part because of its strong management team and because Burlington Northern has been more aggressive than its peers in developing new technology, making it more profitable.