Buffett Bets 'All In' On U.S., Coal With $44 Bil Railroad Buy

• Kevin Harlin
• On 7:08 pm EST, Tuesday November 3, 2009

Billionaire investor Warren Buffett says he's making an "all-in" bet on the U.S. economy with his $44 billion buy of No. 2 railroad Burlington Northern Santa Fe.

It's the largest buy yet for Buffett-led Berkshire Hathaway (NYSE:BRK-A - News).

Berkshire will pay $34 billion, or $100 a share, for the 77% of Burlington Northern (NYSE:BNI - News) it doesn't own. It'll also assume $10 billion in debt.

Burlington shot up 27.5% to 97. Berkshire's class A shares rose 2% to 100,450. Its class B (NYSE:BRK-B - News), which Berkshire plans to split 50-for-1, climbed 2% to 3,325.40.

"Our country's future prosperity depends on its having an efficient and well-maintained rail system," Buffett said Tuesday in a statement. "Conversely, America must grow and prosper for railroads to do well. ... It's an all-in wager on the economic future of the United States. I love these bets."

Analysts say the takeover is also a gamble on an improving global economy, and for a more central role for railroads in the nation's transportation infrastructure.

"Rail is making a once-in-a-business-lifetime comeback from obscurity and near death," said Tony Hatch, a rail and transportation consultant with ABH Consulting.

Rail, which moves about 40% of the nation's freight, fares better than trucking when fuel prices are high. It's also key to moving food and other exports to U.S. ports, and foreign goods from them.

Demand should revive after waning in the recession. Analysts also cite rising fuel costs, growing energy demands and Washington's push to shift freight off highways.

"You've got a variety of secular things making railroads more attractive," Hatch said. "He's not making a purely cyclical bet."

And it's a bet that coal will remain king -- despite legislative efforts to curb carbon emissions. Coal fuels about half of U.S. energy output, and railroads move most of it.

Berkshire also owns MidAmerican Energy, a utility that generates energy from coal and other fuels.

Coal accounted for 22% of BNSF's revenue last year. Agriculture products accounted for 19%.

"They have a very attractive revenue mix," said Lee Klaskow, senior transportation and logistics analyst with Longbow Research. "Forty-plus percent of revenue is core needs of people. We need to heat our homes. We need to eat."

The company operates 50,000 miles of track in 28 states and two Canadian provinces.

Fort Worth, Texas-based BNSF's 2009 volume is off 16.6% through Oct. 24. But demand and pricing are slowly improving, analysts say.

About a third of BNSF's 2008 revenue of $18 billion came from intermodal cargo -- standard shipping containers that can be stacked on ships, trucks or train cars.

BNSF Chairman and CEO Matthew Rose, who's expected to stay at the helm, praised the deal.

"We admire Warren's leadership philosophy supporting long-term investment that will allow BNSF to focus on future needs of our railroad, our customers and the U.S. transportation infrastructure," Rose said in a statement.

The BNSF takeover dwarfed two other deals announced late Monday. Stanley Works (NYSE:SWK - News) will buy rival tool maker Black & Decker (NYSE:BDK - News) in a deal initially valued at $4.5 billion, or $57.56 a share. Peet's Coffee (NasdaqGS:PEET - News) will buy Diedrich Coffee (NasdaqCM:DDRX - News) for $213 million, or $26 a share.

Analysts say Berkshire's buy doesn't portend more railroad deals. "There's less competition for anyone who can write a $44 billion check," Hatch said.

Berkshire owns about 2% of No. 1 rail operator Union Pacific (NYSE:UNP - News), which rose 8%. CSX (NYSE:CSX - News) climbed 7% and Norfolk Southern (NYSE:NSC - News) 5%.

Buzz up!