Buffett's Big Deal

Most important of all, however, it’s an all-in wager on the economic future of the United States.

- Warren Buffett on his acquisition of Burlington Northern

Tuesday morning, Berkshire Hathaway (BRK.A) came to an agreement to acquire the remaining shares of railroad Burlington Northern Santa Fe (BNI) that it does not already own for $100 a share in cash and stock. Berkshire already owns 77 million of 340 million (22.6%) outstanding Burlington shares. Berkshire is paying more than $26 billion to acquire the remaining 263 million shares.

Burlington earned $5.38 over the last four quarters excluding some charges for a trailing multiple of 18.6. Burlington’s business, which is economically sensitive, has been under pressure during the recession with rail volumes off 17% in the first nine months of the year compared to last year.

Of course, Buffett is a notoriously long term investor and Burlington Northern is a great railroad operator with operating margins well north of 20% that is still profitable and will be even more so if/when the economy recovers.

This is a big deal by a man many consider the greatest investor in the world.

Click to enlarge:

Disclosure: Top Gun has no position in Burlington Northern (BNI) shares.

Comments

[Denis Gould]

De-risking the Berkshire portfolio by buying a highly stable business and describing it as "an all-in wager on the economic future of the United States" is rather subtle. What you are actually saying is you recognise that the debt burdened economy is going to be in the doldrums for years to come. So interest rates will be low and you can get a better return on a dull business like rail transport. Whereas it sounds like you are saying you are betting on the economy being strong. Sage indeed.

2009 Nov 04 03:10 AM