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Who will Pay for the Burlington Acquisition?


dcollon
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No offense to that author, but if you're going to critique an investment, especially one made by the greatest investor of all time, your own reasons should probably dig deeper than a comparison of current PE to long-term average PE.

 

The fact of the matter is Berkshire acquired a utility.  It will earn him more than the current return on cash or long term treasuries.  And it will give him the opportunity to re-invest significant amounts at 10%- which is significantly more than long term treasuries and cash.

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While I trust that BRK purchase of Burlington will, with time, prove to be a wise decision, I do find a few parallels between this and the Kraft deal - primarily, using what appears to be undervalued stock to make an aquisition. Has anyone come across Buffett's answer to this question (given that he was so critical about the Kraft purchase for this reason)?

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Rosenfield also sold the pizza business at 9x pre-tax income to fund the purchase. Buffett referenced the Post sale from 2007 as an example of how the transaction should have occurred to avoid taxes. On the other hand, that was a reverse Morris trust deal and I don't think that many acquirers would agree to such terms. 

 

The costs of the Burlington deal might be a little higher if you include the sales of discounted companies like JNJ <$60 from Berkshire's portfolio.

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I suspect there is lot more to the valuation equation than the P/E multiple for BNI seems high and Berkshire stock seems cheap just based on snapshot metrics.  The calculus was probably a lot more complex than Buffett publicly revealed with some likely factors being: 1) BNI's excess cash flow can be reinvested at higher rates w/ Buffett accessing/allocating all of BNI's capital; 2) Over time, BNI would enjoy lower cost financing being financed at Berkshire vs. as a BBB rated company (lowering interest expense and thus the effective P/E multiple paid); 3) Using stock was essential (in Buffet's mind) to keep Berkshire at a AAA like balance sheet to properly capitalize the insurance businesses and take advantage of future investment opportunities that a only AAA balance sheet can allow; 4) BNI diversified Berkshire away from consumer/financial businesses; 5) as the only hauler of PRB coal (cleanest coal) to the utilities in the southeast (no other rail does this), BNI retains pricing power in an inflationary environment (a major Buffett concern being inflationary pressures over time--owning this business is another way of expressing a bearish view on LT interest rates/treasuries, which the insurance businesses are heavily exposed to); 6)  with nearly 50% of BNI's revenues going to utilities utilizing coal fired plants, the acquisition is a bet that coal (especially PRB) will be the dominant coal for the long term; 7) there is upside potential from the growth of shipping to Asia over time, which will boost intermodal revenues.

 

I doubt this will happen because to Buffett, being a AAA -like company is critical and has its own long-term value creation qualities, but using stock to conduct an acquisition and then immediately repurchasing shares is a tax efficient way for BNI shareholders to participate in owning Berkshire shares while all of Berkshire shareholders recapture the value dilution of using undervalued stock to acquire "overvalued" stock.  Buffett was an ardent supporter of this capital allocation strategy when P&G acquired Gillette.

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The dots are too far away to connect them together. As brilliant as Buffett is, he also like simple plans he can understand... because they are the ones that succeed.

 

Interesting insight on future of railroads, especially about the wind farms.

 

BeerBaron

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I thought there were a few points as well that were just too many steps away to anticipate, however building windmills on land you already own makes a lot of sense.  Makes even more sense when you already have a railroad running right through the middle of it to deliver all the components, heavy equipment and a corridor to run the cabling. 

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