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Buffett buys new train set
Old 11-03-2009, 08:50 AM   #1
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Buffett buys new train set

Berkshire buying Burlington Northern railroad - Yahoo! Finance

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"Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry," Buffett said in a statement.
Quote:
...Berkshire's board also approved a 50-for-1 split of its Class B common stock...
Buffett said on CNBC this morning that BH will still have about $20B in cash left after the deal...
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Old 11-03-2009, 08:57 AM   #2
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Wow. I never thought I'd own several hundred shares of Berkshire.
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Old 11-03-2009, 09:27 AM   #3
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Drat - I own a few shares of the other guy - Union Pacific.

Wonder what's gonna happen there with a a competitor going 'private' in a manner of speaking.

?

heh heh heh -
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Old 11-03-2009, 09:37 AM   #4
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Looks like Goldman Sachs handled the deal, which Buffet put money into last year, so in effect he gets a "rebate" to do the deal.........

That dude is scary smart...........
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Old 11-03-2009, 10:07 AM   #5
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Looks like Buffett just traded about 16B in low yielding cash for 16B in BNI stock with an earnings yield of about 7%. Possibly a real return of 7% if they can increase prices with inflation.

BNI seems like another utility type play, with regulated bond-like returns and big needs for additional cash invsetments in the future to help soak up Berkshire's future cash generation.

I will gladly take a possible 7% real return going forward, if it works out that way............
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Old 11-03-2009, 10:21 AM   #6
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Speculation is that this will fit in well with another BRK holding, Midamerican Energy. They use a LOT of coal. BNSF hauls a lot of coal. There are probably efficiencies to be gained and profits to keep in house.
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Old 11-03-2009, 10:25 AM   #7
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Originally Posted by cardude View Post
Looks like Buffett just traded about 16B in low yielding cash for 16B in BNI stock with an earnings yield of about 7%. Possibly a real return of 7% if they can increase prices with inflation.

BNI seems like another utility type play, with regulated bond-like returns and big needs for additional cash invsetments in the future to help soak up Berkshire's future cash generation.
I've heard some analysts indicate they think this is a way to play coal without actually dabbling in the underlying commodity.
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Old 11-03-2009, 12:29 PM   #8
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I wonder if Buffett was still holding BNSF call options. If he buys the company, does he get a refund of his premiums?

Some interesting aspects to this purchase:
- This is Berkshire's biggest acquisition. Ever.
- Buffett hates paying with Berkshire stock. The only times he's done that is when he considers the stock overvalued (I doubt that's the current situation) or when the sellers demand it (not likely the situation for a publicly-traded company) or when Buffett really really really wants the company.
- Not only is he buying with Berkshire stock, he's paying a premium for a company that's not on sale or in some sort of trouble. Highly unusual. Yeah, yeah, a "wonderful company at a fair price" and all that, but I'm just saying that it's not his normal Constellation Energy vulture lowball practice.
- Apparently railroads have a very big moat. Well-run railroads, anyway. But IIRC there's a constant tug-of-war competition with the trucking industry...
- ... but not for hauling coal. It seems that the only thing hauling coal is rail. I suspect that Mid-American has locked in their coal-hauling prices forever.
- He's never split shares 50:1, let alone split "B" shares 50:1. At roughly today's prices, each BNSF shareholder is holding $100/share for which they'd get a ~$66 Berkshire "C" share and some cash.
- Berkshire's quarterly report will be released this Friday night. Funny how the BNSF deal came together quickly enough to be included in that. I think the real timing issue was Buffett waiting until hurricane season ended so that he'd know how much cash he had available for investing in an acquisition this big.
- Mid-American's/NetJet's CEO Sokol is rumored to be Buffett's successor. I wonder how he was involved in this negotiation.
- Despite the occasional speculative rumor, putting so much into the BNSF acquisition implies that Buffett is probably not going to partner with Kraft to pursue Cadbury.
- Daily trading volume of Berkshire's "B" shares has been steadily rising, and accelerated when he made his 20-year donation to the Gates Foundation (requiring the foundation to sell the annual donation of "B" shares each year). Options recently started trading on these shares, another sign of liquidity. Issuing more shares (and continuing rising volume) could result in Berkshire being added to the S&P500 within the next few years.
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Old 11-03-2009, 01:39 PM   #9
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- Berkshire's quarterly report will be released this Friday night. Funny how the BNSF deal came together quickly enough to be included in that. I think the real timing issue was Buffett waiting until hurricane season ended so that he'd know how much cash he had available for investing in an acquisition this big.
He mentioned this morning that they had been avoiding FL and CA reducing risk in the insurance bidness...
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Old 11-03-2009, 03:36 PM   #10
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Looks like Buffett is chugging along, full steam ahead, and is betting the railroads are still an important engine in America economic growth. Given his track record I am happy passenger on the Omaha express.

It is pretty cool, I now own more than 1,000 shares of Berkshire, and a railroad. Now that Buffett has bought C&O and B&O he only needs to acquire Reading and Shortline to collect double rent and railroad the competition.
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Old 11-03-2009, 04:24 PM   #11
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When do you need to own the shares to be part of the 50:1 split. If/when the board approves this will they use a date in the past?
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Old 11-03-2009, 05:16 PM   #12
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He must have a really big Christmas tree!
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Old 11-04-2009, 01:38 PM   #13
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Anybody planning on buying Burlington stock now?
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Old 11-04-2009, 04:02 PM   #14
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I think that in addition to a play on economic recovery, this is a bet on higher energy prices in the future. Rail let's you move a ton of freight 20 to 40 times the distance trucks can on a given amount of diesel. And I bet the utility holdings gave them extra insight into BNI's business.

Seems like a good bet, but a big one. I suspect Berkshire will not be writing much cat reinsurance for a while after doing this. Fine by me, given that I own pieces of other cat reinsurers.
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Old 11-04-2009, 05:05 PM   #15
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When do you need to own the shares to be part of the 50:1 split. If/when the board approves this will they use a date in the past?
Andy,
No date set. The following from the official news release at 2009 News Menu

Omaha, NE (BRK.A; BRK.B)—Berkshire Hathaway Inc. today announced that its Board of
Directors approved a 50-for-1 split of its Class B Common Stock. The stock split is subject to
the approval of Berkshire’s shareholders, who must approve an amendment to Berkshire’s
certificate of incorporation to increase Berkshire’s total number of authorized shares of common
stock, as well as the total number of authorized shares of Class B Common Stock, in order to
permit the consummation of this split. Berkshire’s Class A Common Stock is not being split.
Berkshire has not yet set the date for the special meeting of its shareholders to vote on the
amendment to its certificate of incorporation, or the record date for the stock split.

-- Rita
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Old 11-04-2009, 07:13 PM   #16
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Rail let's you move a ton of freight 20 to 40 times the distance trucks can on a given amount of diesel.
You main point is correct. Just to nitpick--trains move a ton of freight about about 3 times the distance trucks can on the same amount of fuel. Or, so the railroad propaganda says.
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Old 11-04-2009, 08:09 PM   #17
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UPDATE 2-S&P may cut Berkshire AAA rating on Burlington buy | Deals | Mergers & Acquisitions | Reuters
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Old 11-04-2009, 09:55 PM   #18
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- Apparently railroads have a very big moat. Well-run railroads, anyway. But IIRC there's a constant tug-of-war competition with the trucking industry...
- ... but not for hauling coal. It seems that the only thing hauling coal is rail. I suspect that Mid-American has locked in their coal-hauling prices forever.
Railroads do have a wide moat. There are only seven Class I railroads in North America -- Union Pacific and BNSF are the only ones in the US running from the West Coast back East (Canadian Pacific is the third to reach the West Coast). To the extent the economy picks up steam and we start buying more stuff from China, it will ship on UNP and BNI. They also ship a ton of coal from Wyoming back East. BNI has modernized and double tracked almost all of its route and is well positioned. With respect to trucking, rail actually benefits preferentially from oil price increases, because its per ton usage of fuel is lower. If oil prices increase as I expect, the rails will take business from the trucking companies.

All in all, I think BNI is a fine company and a darned good investment, which is why I bought it in September 2004 at $37.25. Counting dividends, it has now returned about 29% compounded annually over the last five years. That said, I sold my BNI yesterday at $97.59. I think Buffett has paid a rich price for this point in the cycle, and I may redeploy to one of the other other rails (probably UNP)
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Old 11-05-2009, 02:41 AM   #19
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Nice investment Gumby. In the past some of Buffett's purchase have cause shareholders to protest the price was too low. On the perfectly logical basis that Buffett never overpays ergo we shareholders are getting taken.

If you are any example I suspect most BNI shareholder will be happy to take the profits either in cash or Berkshire stock.

I have mixed feelings. It doesn't strike me a real bargain, on the other hand even though I know it is foolish to believe that anybody can beat the market , the guy in Omaha has pretty good track record so I am inclined to believe that this isn't a stupid purchase.
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Old 11-05-2009, 06:39 AM   #20
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