Buffett Buys Burlington, Does 50-1 Split at Berkshire

Warren Buffett’s Berkshire Hathaway (BRK.A) has been making some very significant moves of late. Selling of Moody’s (MCO) shares is one. But, the latest is sure to cause a stir amongst Buffett watchers because he is definitely making some “bets” on economic recovery with his purchase of Burlington Northern Santa Fe (BNI). It is unclear as yet what precipitated the share split (Hat tip Roula).

From Business Wire:

The boards of directors of Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) and Burlington Northern Santa Fe Corporation (BNSF; NYSE: BNI) today announced a definitive agreement for Berkshire Hathaway to acquire for $100 per share in cash and stock the remaining 77.4 percent of outstanding BNI shares not currently owned to increase its holdings to 100 percent. Based on the number of outstanding BNI shares (including shares currently owned by Berkshire) on Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt, making it the largest acquisition in Berkshire Hathaway history.

“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. “Conversely, America must grow and prosper for railroads to do well. Berkshire’s $34 billion investment in 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,” said Mr. Buffett. “I love these bets.”

Railroad freight traffic is often used as a proxy for aggregate demand in the economy when looking for substitutes to government measures of GDP or consumption. So, clearly Buffett is making a bet on American prosperity going forward as the last paragraph I quoted says.

However, the announcements today at Berkshire were a twofer as Berkshire also announced a 50-1 stock split. Berkshire couches the rationale for the split in terms of making the transaction viable for small stockholders of Burlington Northern Sante Fe, but I suspect there is a bigger plan. The press release on Berkshire’s site says (.pdf):

The great majority of the stock issued by Berkshire in the BNSF acquisition announced today will be “A” shares. “B” shares, however, will also 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 holdings of BNSF shares that elect a tax-free exchange.

Berkshire Hathaway “A” shares last traded for a massive $98,750.00, putting it clearly out of reach for the average retail investor except through participation in a fund. Berkshire created the B-class of shares to accommodate more retail-oriented investors. So, I suspect this is a move to put “B’ shares further into the reach of retail investors. The B-shares last traded for $3,265, so a 50-1 split puts them at $65.30, a price any retail investor would find reasonable.

Comments

[secmaven:]

And the coal traffic from the coal fields of the west is going to increase in the face of bargain basement NG and the green revolution? LOL Warren.

Nov 03 11:20 AM

[Dialectical...:]

Railroads themselves are not incompatible with the "green revolution" (if such a thing exists), as they are a more efficient way to move cargo than plane or truck. And we are a long way off from abandoning coal. I think it is a good bet in the long term.

On Nov 03 11:20 AM secmaven wrote:

> And the coal traffic from the coal fields of the west is going to
> increase in the face of bargain basement NG and the green revolution?
> LOL Warren.

Nov 03 01:41 PM

[Gadz:]

Seriously, you're betting against Buffett? :)


On Nov 03 11:20 AM secmaven wrote:

> And the coal traffic from the coal fields of the west is going to
> increase in the face of bargain basement NG and the green revolution?
> LOL Warren.

Nov 03 02:11 PM

[helplessobs...:]

As an old ex railroad employee I find Buffett knows his railroads. The combination of the Northern Pacific, Burlington and Santa Fe makes up the greatest railroad empire in world history. All routes are complementary and in the Western US where growth will occur. These assets will generate profits when others are long in their graves.

Nov 03 05:07 PM

[Advill:]

Mr Buffet has some actions that sometimes are a paradox, and his investment behavior sometimes is similar to another big billionaire Mr Slim...they buy what they had when young and poorer, in Mr Buffet case is the California factory of chocolates, and Dexter shoe (both poor investments ), in Mr. Slim case was a bakery chain and a very popular restaurant- store chain in Mexico (Sanborn's).

In the case of the Railroad is more a kind of legacy investment, railroads requires a very intensive capital activity, just maintaining rails, infrastructure and keeping investments in new equipment absorbs a sustancial portion.

I respect a lot Mr. Buffet since 1978 that i read first time about him but he is not infallible.

Rgds.

Nov 04 12:34 AM

[long_on_oil:]

Allowing small investors the ability to purchase BRK shares is a great move. If you are funding a 401k or IRA you will now be able to purchase several shares of BRKB per month rather than having to save your money just to buy one share. I see no negative to this move.
Its not like Wal Mart where the shares are so diluted that the price hasn't moved in 10 years. This move will propel BRKBs to a $5,000 equivalent which is $100 post split. I have owned BRK for some time now and I am elated.
However, I do feel this should be the last split because this sets the stage for market saturation and dilution and that is not good for the shareholders.

Nov 04 08:40 AM