Burlington Northern, the nation's second-largest railroad, is the biggest hauler of food products like corn and coal for electricity, making it an indicator of the country's economic health. The railroad also ships a large amount of goods - including everyday items such as refrigerators, clothing and TVs_ from Western ports like Los Angeles, Long Beach, Calif. and Seattle.
Analysts say Buffett is planting both feet in an industry that is poised to grow as the economy gets back on solid ground. If approved, it would be the biggest acquisition ever for Berkshire Hathaway Inc.
Berkshire Hathaway already owns about 22 percent of Burlington Northern, and said it will pay $100 a share in cash and stock for the rest of the company, a 31.5 percent premium on Burlington Northern's Monday closing price. Shareholders have the option to convert their stock for a cash payment of $100 per share or receive Berkshire Class A or Class B common stock. Up to 60 percent of the deal is cash and 40 percent is in stock.
"Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry," Buffett said in a statement.
"Most important of all, however, it's an all-in wager on the economic future of the United States. I love these bets," he said.
The majority of the stock in the deal will be Berkshire's "A" shares, but Berkshire's board also approved a 50-for-1 split of its Class B common stock for holders of smaller amounts of Burlington shares who opt for a share exchange rather than cash. Berkshire's Class B shares closed Monday at $3,265. With the split, each share will be worth $65.30. Burlington shares shot up $21.33, or 28 percent to $97.40 in morning trading. Shares of other major rails, including Burlington's larger rival Union Pacific Corp., rose as well.
Berkshire also owns stock in two other major U.S. railroads - 9.56 million shares of Union Pacific Corp. and 1.93 million shares of Norfolk Southern Corp., as of June 30.
The deal for Burlington Northern has been approved by the boards of both companies, but still needs two-thirds approval of Burlington's shareholders and antitrust clearance. The railroad expects to clear those hurdles in the first three months of next year.
Last week the railroad reported third-quarter profit dropped 30 percent from a year earlier, as consumers continued to hold back on buying retail goods and industrial production struggled.
Burlington Northern made about 31 percent of its money in the last quarter from shipments of consumer products from the West to major hubs like St. Louis, Kansas City and Chicago.
It's next largest segment was coal, at 27 percent, followed by industrial products - like farm equipment, lumber and chemicals - at 21 percent. Its agricultural products segment, 20 percent of its total revenue, includes major crops like corn, wheat and soybeans - much of that exported to China.
Burlington Northern serves more of the nation's major grain-producing regions than any other railroad.
Burlington is one of the least optimistic among major railroads about the pace of economic recovery. CEO Matt Rose said consumers will be the driver of any improvement in the economy, but no one is buying yet. Coal shipments to power plants have fallen off sharply because of lower electricity demand. Burlington Northern hauls enough coal to power one out of every 10 homes in the U.S.
The coal hauled by Burlington Northern is mined from places like the Powder River Basin in Wyoming and Montana. It's lower in sulfur than the coal found in the eastern U.S., meaning its less polluting and more in demand now that stricter emissions standards are being imposed on coal plants.
Berkshire owns major utilities that rely on coal through its MidAmerican Energy Holdings Co.
Analysts say Buffett is looking for an investment that will reap rewards for many years into the future, and isn't so concerned about immediate gains.
"(Buffett is) buying at the trough - things aren't going to get much worse. He's getting in at a good time," said Art Hatfield, an analyst with investment firm Morgan Keegan.
Berkshire's biggest acquisition before BNSF was the $16 billion stock purchase of reinsurance giant General Re announced in 1998.
Hatfield said he believes Buffett went for Burlington Northern in part because of its good management team, an important aspect in any of the billionaire's deals.
Hatfield also said that Burlington Northern has been more progressive than its peers in developing new technology, making it more profitable. Major railroads have been able to slash costs during the recession by cutting jobs, parking railcars, improving train speeds and other moves that improved efficiency.
Railroads are much more energy-efficient than trucks because they use much less fuel. An average Burlington Northern train hauls as much freight as 280 trucks. Rails are also favored by some shippers because they can carry things that can't travel on highways, like hazardous chemicals.
Burlington Northern cut its total expenses by nearly a third in the last quarter. Total labor costs fell by 17 percent from a year ago. Burlington Northern has drastically reduced its employees since 2007, as the recession caused freight demand to plummet.
AP Business Writers Josh Funk in Omaha, Neb., and Deborah Jian Lee in New York contributed to this report.
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