Berkshire to Buy Burlington Northern for 34B

[DCG]

I'm sure Warren is viewing it as a fair price to earnings farther out in the future (maybe 2012 or beyond), than 2010, but it still seems a bit expensive considering the large amount of debt and loan he had to take on.

[arbitragr]

So he finally decides to use all the cash.

This takes the guess work out of what the successor will do with the cash once Warren is gone.

He must have had a health scare this year or something.  :-\

[oldye]

So he finally decides to use all the cash.

This takes the guess work out of what the successor will do with the cash once Warren is gone.

He must have had a health scare this year or something.   :-\

 

Berkshire will keep generating tons of cash and any successor will have to find ways to allocate that capital...you might want to read a little about the company before making ignorant comments.  

[Guest dealraker]

Arbitragr wrote: "He must have had a health scare this year or something."

 

This is exactly the type of comment I come to this board to get away from.  This guy should be banned from the board.  STUPID comment.

[DCG]

So he finally decides to use all the cash.

This takes the guess work out of what the successor will do with the cash once Warren is gone.

He must have had a health scare this year or something.   :-\

 

This deal was structured so that BRK didn't have to tap very far into its current cash.

[arbitragr]

Easy now boys. I'm a realist.

[Uccmal]

The price is perhaps high but I would think that Buffett has worked it all out.  The economics of a dominant railroad must be pretty good right now for the first time in about 90 years.  Buffett has had about 60 years to get familiar with the economics of railroads since reading Ben Graham. 

 

Fuel, and greenhouse effect were mentioned above.  Higher fuel prices make railways more viable.  Similarly railways must do well if the greenhouse effect is monetized.  There is more to this than meets the eye.

 

What do you need to spend to keep a railway going?

1) Occasionaly replacement of engines and cars - Depreciated away

2) Labour - 2 people to run a mile long train - a few people in stations - repair staff

3) IT and logistics - much of this is picked up at either end of a trip. 

4) Fuel - priced on to the user. 

 

Alot of free cash.  I expect Buffett has waited for this one for about 50 years. 

 

[Myth465]

Arbitragr wrote: "He must have had a health scare this year or something."

 

This is exactly the type of comment I come to this board to get away from.  This guy should be banned from the board.  STUPID comment.

 

I think you guys are being a bit too hard / sensitive. Its a little tongue and cheek and sarcastic but, doesnt seem to bad. Plus he might be British.

[beerbaron]

The price is perhaps high but I would think that Buffett has worked it all out.  The economics of a dominant railroad must be pretty good right now for the first time in about 90 years.  Buffett has had about 60 years to get familiar with the economics of railroads since reading Ben Graham.   

 

Fuel, and greenhouse effect were mentioned above.  Higher fuel prices make railways more viable.  Similarly railways must do well if the greenhouse effect is monetized.  There is more to this than meets the eye.

 

What do you need to spend to keep a railway going?

1) Occasionaly replacement of engines and cars - Depreciated away

2) Labour - 2 people to run a mile long train - a few people in stations - repair staff

3) IT and logistics - much of this is picked up at either end of a trip. 

4) Fuel - priced on to the user. 

 

Alot of free cash.  I expect Buffett has waited for this one for about 50 years. 

 

 

CapEx! That has always been the Achilles’ heel of Railway business. They have to maintain their roads. The good news is that they are also in a monopoly like business... if other transportations become unsustainable the elastic could extend a lot.

 

Maybe that it's bet that with oil increasing in price, rail freight will be more lucrative business. It's a much safer bet then a future contract on oil.

 

BeerBaron

 

 

[txlaw]

WB mentions rails is the "greenest" of all transportation...Is there a way to monetize that via proposed cap n trade regulations ? If yes, then it can probably balance out the MidAmerican coal plants which are definitely going to get hit by increased taxes...

 

 

Cap and trade will probably reduce domestic demand for coal relative to other electricity generation sources.  I think that means that a greater percentage of U.S. coal production will be exported going forward, particularly to emerging markets in Asia.  That should directly benefit BNI, which owns a major artery from the Powder River Basin to the major West Coast port cities.

 

So BNI could be a nice hedge against cap and trade, although it seems like coal exports should grow regardless of whether cap and trade goes through. 

 

 

[prevalou]

two questions

1) why did Buffett wait so long to buy BNI (he had the cash and  he buy the stock at its highest level) ?

2) if it's a hedge on energy prices, why not buy oil barrels instead ?

[rkbabang]

I think you guys are being a bit too hard / sensitive. Its a little tongue and cheek and sarcastic but, doesnt seem to bad. Plus he might be British.

 

True. The from a British perspective someone Buffet's age is way too old to be treated, so almost any little health problem could be deadly.  It doesn't work that way (yet) in the US. Although even when it does Buffet will have the money to fly to Mexico and pay cash for superior healthcare over the boarder.

 

--Eric

 

[value-is-what-you-get]

 

So BNI could be a nice hedge against cap and trade, although it seems like coal exports should grow regardless of whether cap and trade goes through. 

 

 

 

Further to the hedge aspect of coal, Cap and Trade may be a BNI hidden asset as a low emission transportation mode like rail would have plenty of carbon credits for sale every year.

[ECCO]

 

 

You mention many good reasons why Buffet did buy BNSF. Personnally, I think its also a big bet to protect BRK against inflation.

 

 

ECCO

[txlaw]

You mention many good reasons why Buffet did buy BNSF. Personnally, I think its also a big bet to protect BRK against inflation.

 

 

ECCO

 

Absolutely.  Railroads are sort of like toll roads -- they have the power to price their services in concert with inflation.  And if we have inflation caused by rising energy prices, the railroads will benefit even more since they use so much less energy per ton-mile than trucks. 

 

Also, although there will always be large amounts of capex to maintain their business, much of the investment in the infrastructure and operational stuff (logistics IT, for example) has been made in a low inflation environment.

 

[Mikenhe]

I think you guys are being a bit too hard / sensitive. Its a little tongue and cheek and sarcastic but, doesnt seem to bad. Plus he might be British.

 

True. The from a British perspective someone Buffet's age is way too old to be treated, so almost any little health problem could be deadly.  It doesn't work that way (yet) in the US. Although even when it does Buffet will have the money to fly to Mexico and pay cash for superior healthcare over the boarder.

 

--Eric

 

 

So you are either an international healthcare expert or you are talking garbage?

 

Got any other sweeping generalizations you’d care to share?

 

[txlaw]

WB mentions rails is the "greenest" of all transportation...Is there a way to monetize that via proposed cap n trade regulations ? If yes, then it can probably balance out the MidAmerican coal plants which are definitely going to get hit by increased taxes...

 

 

Cap and trade will probably reduce domestic demand for coal relative to other electricity generation sources.  I think that means that a greater percentage of U.S. coal production will be exported going forward, particularly to emerging markets in Asia.  That should directly benefit BNI, which owns a major artery from the Powder River Basin to the major West Coast port cities.

 

So BNI could be a nice hedge against cap and trade, although it seems like coal exports should grow regardless of whether cap and trade goes through. 

 

 

 

Just read a transcript of Buffett on Fox Business.  Check this out:

 

CLAMAN: Cheapest, best way. But then there's cap-and-trade, Warren. Some analysts are very skittish about coal and a possible backlash if cap-and-trade goes through. You mentioned now -- you said, we're going to see a diminishing of coal use. But what do you think cap-and-trade would do to the business if that went through?

 

BUFFETT: It won't change the composition of what utilities are doing tomorrow or next week or next year. The utilities over time are going to use less coal and probably more nuclear. Our own utility, for example, uses wind very substantially in Iowa.

 

So, over time, coal is going to diminish somewhat. Now, I think that will hit Eastern coal more than Western coal, but that's a fact of life over a considerable period of time. And that's true whether there's cap-and-trade or not, yes.

 

[Guest longinvestor]

two questions

1) why did Buffett wait so long to buy BNI (he had the cash and  he buy the stock at its highest level) ?

2) if it's a hedge on energy prices, why not buy oil barrels instead ?

 

Answer to question 1 came from the horse's mouth. WEB admitted he was 5 years late also saying he is glad he is not 20 years late.

 

If you look at the map of BNSF territory, it goes from SW Pacific until Mobile, AL and from Duluth, MN to NW pacific. Besides coal, grain we have Bentonville, AR and the CA container ports, many entry points into Mexico and Canada. I remember WEB saying the double stacked container transport is also big change for the railways.

 

We are stuck with declining fossil fuel, commodity imports etc for the foreseeable future.

[kapilm]

This makes sense. The move away from coal is inevitable atleast in US/EU. So wether rails benefits via cap n trade or not it doesn't make much of difference to WEB. Its interesting to see how WEB  focuses exclusively on the standalone merits of the business. Completely different from the other conglomerates like GE where synergy is given more weightage in deals.

 

[SharperDingaan]

Did you notice that this is also a bet on a lower USD

 

With exports higher, imports lower, & more production taking place in the US - its highly likely that the volume of goods over these tracks is going to rise, which will also push up freight prices/mile. Pricing power.  

 

SD

[txlaw]

Did you notice that this is also a bet on a lower USD

 

With exports higher, imports lower, & more production taking place in the US - its highly likely that the volume of goods over these tracks is going to rise, which will also push up freight prices/mile. Pricing power.  

 

SD

 

Yup, and I think that increased exports won't be canceled out by decreased imports in terms of volume for BNI because a great percentage of exports will be going to Asia rather than Europe. 

 

So here's why BNI will have increased volume relative to other U.S. railroads, particularly those on the east coast:

 

1.  Lower U.S. dollar means higher exports in general, particularly to Asia and Australasia, where currencies will increase relative to the dollar over time

 

2.  Diminishing importance of coal (due to carbon concerns) will mean more coal is exported to Asia.  If the U.S. really is the Saudi Arabia of coal, BNI stands to benefit immensely from the coal export trade.

 

 

Increased demand for railroad transport due to energy inflation plus BNI's West-coast toll road pricing power = great business.

 

[dowfin1]

Txlaw,

While I agree with your point re effect of a lower dollar, Alice S. put it this way, implying somthing else:

 

"There are many other motives. Burlington is well-managed. Railroads are a bet against the U.S. dollar and in favor of higher energy costs. Railroads are a play on the trade deficit because this is how we haul all those containers of stuff imported from Asia. "

 

http://www.bloomberg.com/apps/news?pid=20601039&sid=aL9x8sp3.Nwk

[twacowfca]

rkbabang is right.  People Buffett's age are not generally treated in

the British system when they develop a serious condition

-- not necessarily terminal just serious.  However these remarks

belong in the general discussion IMHO.

[Mikenhe]

rkbabang is right.  People Buffett's age are not generally treated in

the British system when they develop a serious condition

-- not necessarily terminal just serious.  However these remarks

belong in the general discussion IMHO.

 

My grandmother was having knee transplants and being treated for temporal arteritis when she was older than Warren Buffett. I suspect that your assertions are based on rumor and not fact.

[txlaw]

Txlaw,

While I agree with your point re effect of a lower dollar, Alice S. put it this way, implying somthing else:

 

"There are many other motives. Burlington is well-managed. Railroads are a bet against the U.S. dollar and in favor of higher energy costs. Railroads are a play on the trade deficit because this is how we haul all those containers of stuff imported from Asia. "

 

http://www.bloomberg.com/apps/news?pid=20601039&sid=aL9x8sp3.Nwk

 

Thanks for linking to that article, Dowfin.

 

There are many points I disagree with.

 

Burlington is well-managed. Railroads are a bet against the U.S. dollar and in favor of higher energy costs. Railroads are a play on the trade deficit because this is how we haul all those containers of stuff imported from Asia.

 

I agree with BNI being well-managed and being a bet against the dollar and higher energy costs.  However, I don't think that BNI is necessarily a play on the trade deficit.  On the contrary, if the dollar goes down relative to the BRIC currencies, as it should in the long run, the trade deficit should shrink as a percentage of GDP.  And if interest rates go up, Americans (individuals and the government) won't be able to finance their consumption as easily, which could reduce the demand for imports on a percentage basis.  Also, higher energy prices could potentially make domestic/local goods (or at least goods where most of the value add is in the U.S.) more competitive with foreign goods. 

 

I'm not saying that the containers of stuff imported from Asia are going away.  I'm just saying that I see BNI as more of a bet on the trade deficit decreasing due to increased exports (such as coal exports).

 

 

[A] motive of the Burlington deal is that it allows Buffett to protect his legacy by diluting Berkshire’s exposure to financial services.

 

It is true that the BNI acquisition dilutes the financial services nature of BRK, but I don't like the way she frames it as an attempt to "protect his legacy" and being all "about Buffett's ego." 

 

Berkshire is Buffett's baby.  It's his palette.  He created the venerable institution, and he wants it to succeed.  He always wants the company to be a collection of great businesses run by great managers.

 

Perhaps I just don't agree with her choice of words, which seem to show a lack of understanding of the relationship that founders have with their companies/institutions.

 

 

I admire and respect Sokol, but my comfort with him as chief executive officer is in inverse proportion to Berkshire’s exposure to financial services. Even brilliant CEOs often can’t manage such companies. The Burlington acquisition makes me a lot happier with Buffett’s choice of Sokol.

 

I don't see why she should be so uncomfortable with Sokol being at the helm even if financial services continued to make up the current percentage of Berkshire's portfolio of businesses.  After all, Ajit Jain is still at Berkshire, and the new CIO will certainly be someone that is a good fit for the job.  Plus you have Bill Gates and other board members ready to step in to prevent wrong decisions from happening.

 

Berkshire will probably be managed in a more collective nature after Buffett is gone, and I think it will work.  Just my opinion, but I think that that will be one of the most surprising things about Berkshire after WEB is gone.  People will be amazed at how well BRK still runs.