Warren Buffett has taken a giant wager on the US economy recovering with Berkshire Hathaway announcing it’s buying the rest of Burlington Northern and Santa Fe, America’s second biggest railroad, that he doesn’t already own. As the New York Times says, the Sage of Omaha is betting that as the economy revives, so will the demand for goods to be shipped by train with Burlington Northern carrying coal and timber from the West, grain from the Midwest and imports arriving directly from Mexico and Canada, as well as through California ports.
The importance of this deal cannot be understated. This is Buffett’s biggest ever takeover. Just as significantly, it involves cash and shares and it’s the first time in many years that Buffett has done a shares deal.
Now the railway is not coming cheap as Berkshire is paying more than 18 times Burlington’s 2010 earnings, with 40 percent of the price in stock. That said, it’s a damn sight cheaper than it would have been during the boom so Buffett would say he is still getting a bargain for the returns it will deliver.
But there are other reasons the deal makes sense. The Investment Marathoner blog says: “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. In recent years, they have become somewhat like electric utilities that earn a respectable return on capital. U.S. railroads, which have been around since the early 1800s, won’t disappear any time soon. Berkshire is lobbying on energy policy, and this deal gives it more clout. There are some subtle synergies between the utility business and the railroad.”
So there you have it. The more important question is whether Buffett is telling us that the economy has bottomed.
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