Berkshire Hits The (Rail)Road And Bags Burlington

The legendary old sage has done it again.

Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) has now officially added another big American outfit to its already impressive stable of holdings.

And in record-setting fashion, too…

This time, the company splurged $26.4 billion to snap up the remaining 77.4% of railroad firm Burlington Northern Santa Fe (BNI: 100.21 -0.02 -0.02%) that it didn’t already own. It was the biggest acquisition in Berkshire’s history.

In a vote, 70% of Burlington shareholders approved the deal, which values the firm at $100 a share and $34 billion overall – a price that Buffett calls “the absolute hilt.” But he’s a renowned railroad bull, with stakes in fellow rail firms, Union Pacific Corporation (UNP: 63.41 -0.20 -0.31%) and Norfolk Southern Corporation (NSC: 48.48 -0.10 -0.21%).

He says the Burlington deal is an “all in” bet on America’s future prosperity: “If you look at the next 50 years, this country is going to grow, it’s going to have more people, more goods moving, and the rails should benefit. It’s the logical way for many of those goods to travel.” He’s got a point…

• In 2009, the four major railroad firms hauled more than 40% of all the freight in the United States.
• Rail transportation is more than three times as efficient as trucks. For example, you can move one ton of freight an average of 400 miles on one gallon of diesel. Compare that to trucks, which move one ton a mere 130 miles on a gallon.
• Hauling capacity is relatively cheap, too. The average cost for a new freight car runs about $81,000 – roughly one-third the cost of a new tractor-trailer truck. And you can string as many as 150 of them together behind a few diesel locomotives, which adds to the operating efficiency.
• Most of the railroad infrastructure is already in place, without the need for much addition. According to the American Association of Railroads, there are about 24,000 locomotives and 460,000 freight cars in the United States. They move around on 140,695 miles of maintained track. The system has plenty of excess capacity and serves all major cities and towns across America.

With around 80 firms already under Berkshire’s wing, the Burlington acquisition expands its diverse range of holdings even further.

You can also bet that it’s not a decision that was taken lightly at Berkshire HQ, since the enormous outlay of cash led to the loss of Berkshire’s triple-A credit rating.

The deal makes sense for Burlington, too – a company currently struggling to produce short-term shareholder value. Despite the economy notching up 6% GDP growth during the fourth quarter, Burlington’s profits fell by 13%. But with Buffett’s keen eye for long-term shareholder value, it could mark a significant point in Burlington’s history.