Investment guru Warren Buffett has made what he calls an “all-in wager on the economic future of the United States” by buying railroad company Burlington Northern in a $US44 billion deal.
The acquisition is the biggest in Buffett’s long career. His investment company, Berkshire Hathaway, already owns just under 23% of Burlington, and will pay $US26 billion for the remaining shares. Berkshire Hathaway will also assume $US10 billion of debt from Burlington.
Buffett has billed the deal as a bet on America’s economy, given railways are typically a cyclical business. And while Buffett is known as a bargain hunter, this deal isn’t exactly cheap, given Berkshire’s $US100-a-share offer represents a 35% premium to Burlington’s previous share price.
But as usual, Buffett seems supremely confident with the move.
“The rail industry has changed in its position in the last five to 10 years and it’s even more vital to transportation in this country than it was 10 years ago,” Buffett said overnight.
“It’s a very effective way of moving goods. 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,” Buffett told CNBC.
“I love these bets.”
Buffett certainly didn’t muck around getting the deal done.
“I made (BNSF chief executive officer Matt Rose) an offer and he said he would take it to his board and it took about 15 minutes,” Buffett told CNBC television.
His confidence might have something to do with the other potential benefits from the deal, which analysts have already spotted.
Some see it as a move to diversify his portfolio after heavy investments in financial services companies such as Goldman Sachs and General Electric.
There is also a school of thought that Buffett wants to increase his exposure to the energy sector. Burlington is a major carrier of coal in the United States, and several energy companies owned by Berkshire Hathaway are major customers of Burlington.
Whatever the exact motives, Buffett’s buy represents a huge vote of confidence in the US economy – at a time when it needs it most.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
