Warren Buffett bets "all in" with a railroad company, Burlington Northern Santa Fe
This news excerpt from Bloomberg, (all bold highlights mine)
``Warren Buffett’sBerkshire Hathaway Inc. agreed to buy railroad Burlington Northern Santa Fe Corp. in what he described as an “all-in wager on the economic future of the United States.”
``The purchase, the largest ever for Berkshire, will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. Including his previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said today in a statement...
``Berkshire has been building a stake in the Fort Worth, Texas-based railroad since 2006 as Buffett looked for what he called an “elephant”-sized acquisition allowing him to deploy his company’s cash hoard, which was more than $24 billion at the end of June. Trains stand to become more competitive against trucks with fuel prices high, he has said."
The rail business will comprise Berkshire's second largest risk exposure after insurance
From Bloomberg, ``Burlington Northern, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second- largest operating unit by sales. The McLane unit, which delivers food to grocery stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008."
``Berkshire’s largest business is insurance, with units including auto specialist Geico Corp. Buffett, who is the company’s chairman and chief executive officer, has said he likes insurance because he gets to invest the premiums paid by customers until the cash is needed to pay claims. The insurance businesses last year collectively earned $7.51 billion on revenue of $30.3 billion."
This news excerpt from Bloomberg, (all bold highlights mine)
``Warren Buffett’sBerkshire Hathaway Inc. agreed to buy railroad Burlington Northern Santa Fe Corp. in what he described as an “all-in wager on the economic future of the United States.”
``The purchase, the largest ever for Berkshire, will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. Including his previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said today in a statement...
``Berkshire has been building a stake in the Fort Worth, Texas-based railroad since 2006 as Buffett looked for what he called an “elephant”-sized acquisition allowing him to deploy his company’s cash hoard, which was more than $24 billion at the end of June. Trains stand to become more competitive against trucks with fuel prices high, he has said."
The rail business will comprise Berkshire's second largest risk exposure after insurance
From Bloomberg, ``Burlington Northern, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second- largest operating unit by sales. The McLane unit, which delivers food to grocery stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008."
``Berkshire’s largest business is insurance, with units including auto specialist Geico Corp. Buffett, who is the company’s chairman and chief executive officer, has said he likes insurance because he gets to invest the premiums paid by customers until the cash is needed to pay claims. The insurance businesses last year collectively earned $7.51 billion on revenue of $30.3 billion."
``Buffett will use $16 billion in cash for the deal, half of which is being borrowed from banks and will be paid back in three annual installments, he told the CNBC. Berkshire will have more than $20 billion in consolidated cash after the purchase, he said...
Buffett's applies Ben Graham's Margin of Safety via a wide investing moatthrough privileges derived from regulation (more evidence on Mr. Buffett as political entrepreneur see previous post Warren Buffett: From Value Investor To Political Entrepreneur?)...
Again from Bloomberg, ``Buffett is increasing his stake in an industry that doesn’t have any competitors for certain types of freight. Federal law requires some chemicals to be moved only by rail.
``Railroads burn less diesel fuel than trucks for each ton of cargo carried, giving companies such as Burlington Northern and Omaha-based Union Pacific a grip on bulk commodities such as coal. That fuel-efficiency advantage also gives railroads a share of the profits from moving goods such as Asian imports of cars and other consumer goods sent to U.S. West Coast ports.
``From ships, containers are loaded onto railcars to be hauled to so-called intermodal terminals, where they’re transferred to trucks for the final leg of their journey."
Finally, Warren Buffett's bet on the railroad industry seems like a pick-and-shovel (indirect) play on commodities or a massive bet on inflation.
According to wikipedia.org, ``Railroads carry a wide variety of commodities, coal being the most single important commodity. In 2006, coal accounted for 21 percent of rail revenue. Coal accounts around half of U.S. electricity generation. Other major commodities carried include chemicals, grain, non-metallic minerals, lumber, cars, and waste materials."
Burlington biggest carload is in coal (energy), which constitutes over 50% of the total and appear to compliment his MidAmerican Energy exposure while, chemicals and motor vehicles make up only 2% and 8%, respectively according to the company's site.
This means commodities with over 80% share of the company's freight cargo comprise is the main business for Burlington.
In other words, Mr. Buffett bets $44 billion on inflation. Action, indeed, speaks louder than words.
``Railroads burn less diesel fuel than trucks for each ton of cargo carried, giving companies such as Burlington Northern and Omaha-based Union Pacific a grip on bulk commodities such as coal. That fuel-efficiency advantage also gives railroads a share of the profits from moving goods such as Asian imports of cars and other consumer goods sent to U.S. West Coast ports.
``From ships, containers are loaded onto railcars to be hauled to so-called intermodal terminals, where they’re transferred to trucks for the final leg of their journey."
Finally, Warren Buffett's bet on the railroad industry seems like a pick-and-shovel (indirect) play on commodities or a massive bet on inflation.
According to wikipedia.org, ``Railroads carry a wide variety of commodities, coal being the most single important commodity. In 2006, coal accounted for 21 percent of rail revenue. Coal accounts around half of U.S. electricity generation. Other major commodities carried include chemicals, grain, non-metallic minerals, lumber, cars, and waste materials."
Burlington biggest carload is in coal (energy), which constitutes over 50% of the total and appear to compliment his MidAmerican Energy exposure while, chemicals and motor vehicles make up only 2% and 8%, respectively according to the company's site.
This means commodities with over 80% share of the company's freight cargo comprise is the main business for Burlington.
In other words, Mr. Buffett bets $44 billion on inflation. Action, indeed, speaks louder than words.
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