Buffett's big bet could help rival railroads
(The following story by Joe Ruff and Steve Jordon appeared on the Omaha World-Herald website on November 4, 2009.)
OMAHA, Neb. — Warren Buffett believes he can make money owning a railroad, and that bodes well not only for BNSF Railway Co., Buffett's target, but the entire industry and BNSF's chief rival, Omaha-based Union Pacific, analysts and industry experts said.
“We like the signal it sends for the broader rails,” said Kevin Kirkeby, equity analyst with Standard & Poor's.
All four major railroad stocks closed higher Tuesday after Buffett announced that his Omaha investment company, Berkshire Hathaway Inc., planned to acquire BNSF for $34 billion in cash and stock and assumption of $10 billion in debt.
Union Pacific issued a statement hailing Buffett's move but declined to comment further.
“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,” the statement said. “A healthy, growing railroad industry is good for our investors, our customers, our employees and our economy.”
Kirkeby said a privately owned BNSF might have some advantages over Union Pacific, which is publicly traded. For example, BNSF could borrow money at lower interest rates to expand and maintain tracks because of Berkshire's financial clout, he said.
BNSF also would have fewer public reporting requirements than U.P. and other publicly traded railroads, Kirkeby said.
But the advantages wouldn't be overwhelming, he said. Union Pacific and BNSF in the West, and Norfolk Southern and CSX Corp. in the East all have established rail networks, Kirkeby said.
Taking business away from trucks and carrying more volume at lower costs is the broad strategy for the railroads, Kirkeby said. There is some overlap in the U.P. and BNSF networks, and over time BNSF might be able to pull more business to its network, but that isn't the immediate concern, he said.
“The near- to medium-term driver is an economic recovery” from the recession, Kirkeby said.
It's unlikely BNSF's major competitors would consolidate, Kirkeby said. Federal regulators would likely frown on any major merger as anti-competitive, he said.
Buffett himself ruled out the possibility of Berkshire acquiring Union Pacific, saying Tuesday that it would remain a BNSF competitor for at least another 50 years.
Randy Jorgensen, an associate professor of finance at Creighton University, said Union Pacific is similar to BNSF in size and other characteristics, so investors might look at U.P. as a good investment, too.
To fund the acquisition, Berkshire will use $8 billion of its own money and borrow $8 billion, repaying it in three annual installments, leaving the company with about $20 billion in cash, Buffett said.
“It doesn't mean we're out of business, but it does mean that we won't be making any huge deals for a while,” Buffett said.
Buffett said his investment in BNSF — which would be the biggest acquisition ever for Berkshire — was a “huge bet on that company, CEO Matt Rose and his team, and the railroad industry.”
Buffett has frequently praised the rail industry's vital role in the nation's economy, the economic advantages of rail transportation and BNSF in particular for its efficiency and earning power.
“The situation of railroads changed dramatically a decade or so ago,” Buffett told CNBC. “Railroads got much more efficient. Right now you've got 90 percent more ton-miles moving than you had 25 or 30 years ago, and you've got them moving on 40 percent less track. The costs have gone down in inflation-adjusted terms. It's become a much more productive industry.”
Union Pacific and BNSF haul many of the same goods across major parts the West and Midwest, including grain, coal, automobiles, household goods, lumber and chemicals.
BNSF, which is based in Fort Worth, Texas, tends to haul more grain and intermodal containers, which are quickly transferred from ships to trucks to rail, while Union Pacific has captured more automobile and chemical traffic, Kirkeby said.
Kirkeby said strategic differences include Union Pacific's willingness to own more railcars, taking that responsibility and cost away from its customers. BNSF has largely been a wholesale carrier, Kirkeby said, although it appears to be reviewing that strategy and could adopt more of U.P.'s approach.
“Those directional choices will play a bigger role” in how the rail companies do than whether BNSF is privately owned, Kirkeby said.
Donna Dudney, an associate professor of finance at the University of Nebraska-Lincoln who teaches a course on Buffett's investment methods, said trust in upper management plays a big role in Buffett's investment decisions.
“He likes what he sees in Rose,” she said.
Buffett also may have chosen BNSF over other railroads because he sees it as a leader in industry technology and profits, Dudney said.
Berkshire already owns 22.6 percent of BNSF. If two-thirds of BNSF's shareholders vote in favor of the sale when they meet early next year, it would surpass Berkshire's 1998 purchase of General Reinsurance for $22 billion.
The sale also is subject to approval by the U.S. Justice Department, which reviews such purchases in light of anti-trust laws intended to prevent monopolies. Berkshire also owns stock in Union Pacific and Norfolk Southern, raising the question of whether it would have to sell those holdings to keep ownership of the railroads separate.
Berkshire does not control any other railroads, however.
BNSF is a major presence in Nebraska, employing more than 4,000 people and operating more than 1,500 miles of track across the state. Its trains haul coal from Wyoming to power plants in the Midwest and East. Alliance, Neb., is a hub for BNSF traffic to the coal fields and West Coast ports.
Buffett has said he prefers to own all of an excellent company rather than owning only part of it. In the past he has purchased publicly traded companies and folded them into Berkshire, including MidAmerican Energy Holdings of Des Moines and auto insurer GEICO. However, most of the companies he has acquired were privately owned.
Wednesday, November 04, 2009
