Buffett Buys Burlington Northern

Written By Brian Hicks

Posted November 3, 2009





A mere few weeks after Burlington Northern reported a 30 percent drop in third-quarter revenue, Warren Buffett decided that was a sign to jump in.

This morning the famed investor decided to buy the shares he didn’t already own for $34 billion.  If approved, it would be the biggest bet ever for Buffett’s Berkshire Hathaway.

From the AP by Samantha Bomkamp entitled:  Buffett’s Berkshire buying Burlington Northern RR

“Warren Buffett’s Berkshire Hathaway Inc. on Tuesday agreed to buy Burlington Northern Santa Fe Corp., making a $34 billion bet on the future of the U.S. economy.

Burlington Northern, the nation’s second-largest railroad, is the biggest hauler of food products like corn and coal for electricity, making it an indicator of the country’s economic health. The railroad also ships a large amount of goods — including everyday items such as refrigerators, clothing and TVs— from Western ports like Los Angeles, Long Beach, Calif. and Seattle.

Analysts say Buffett is planting both feet in an industry that is poised to grow as the economy gets back on solid ground. If approved, it would be the biggest acquisition ever for Berkshire Hathaway Inc.

Berkshire Hathaway already owns about 22 percent of Burlington Northern, and said it will pay $100 a share in cash and stock for the rest of the company, a 31.5 percent premium on Burlington Northern’s Monday closing price. Shareholders have the option to convert their stock for a cash payment of $100 per share or receive Berkshire Class A or Class B common stock. Up to 60 percent of the deal is cash and 40 percent is in stock.

“Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry,” Buffett said in a statement.

“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”

Love him or hate him, you would have to admit the guy is pretty sharp.

That being said, a 30% premium seems pretty high on this one. Since when does a railroad merit a 20 P/E?

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