Buffett buying Burlington rail in his biggest deal

The deal, announced on Tuesday, is the billionaire investor's biggest-ever acquisition and may prompt him to sell some of his other investments, which include a wide range of companies from Coca-Cola Co to General Electric Co, some Buffett watchers said.

By betting on BNSF, Buffett -- the world's second-richest person and a long-time model train buff -- renewed interest in a storied, but highly cyclical American industry that has tried to reinvent itself by emphasizing its ability to move goods cheaply and efficiently.

"It's an all-in wager on the economic future of the United States," Buffett, who has been building up his rail holdings for several years, said in a statement. "I love these bets."

Buffett will pay a premium of 31.5 percent over BNSF's closing stock price on Monday, valuing the railroad at $34 billion, or 18 times estimated 2010 earnings. Most rail companies' P/E ratios are in the mid-teens.

BNSF shares jumped 27.51 percent and other U.S. and Canadian rail shares also rose, as analysts said the deal puts an oft-neglected industry in Wall Street's focus and could bring some fresh money into the sector. But they did not expect a wave of deals in the railroad sector, given regulatory concerns.

"Buffett has always stated that he likes the longer-term viability of the rails ... but people really weren't paying attention," said Longbow Research analyst Lee Klaskow. "This is shining a spotlight on this group, bringing more investors into the fold."

SHARE DEAL UNUSUAL FOR BUFFETT

Buffett, who has long preferred all-cash deals, is paying $100 per share in cash and stock for the 77.4 percent of BNSF shares that Berkshire does not already own.

Berkshire would also assume $10 billion of BNSF debt. It would pay about $16 billion in cash, of which $8 billion would be from its own funds and the rest from debt.

Smoothing the way for the share exchange, Buffett reversed his long-time opposition to stock splits, which has resulted in Berkshire having the highest per-share prices of any shares on the New York Stock Exchange. Buffett agreed to a 50-for-1 split of Berkshire Class B stock, which will make it much more accessible to retail investors.

The Class B shares trade at over $3,000, and the Class A shares at more than $100,000. The B shares were up about 1.9 percent and the A shares about 1.7 percent.

Berkshire could not do an all-stock deal because it would deplete its capital beyond what insurance regulators would allow, said Justin Fuller, an analyst at Midway Capital Research & Management in Chicago and author of the Buffettologist.com blog.

Buffett is not expected to shed any of Berkshire's biggest holdings, which include insurers such as Geico, analysts said. It has close to 80 units with products ranging from carpeting to natural gas, ice cream, paint and underwear.

"They tend to accumulate capital faster than they know what to do with it and this is a really good deal for them," Fuller said. "It will create a lot of value for Berkshire."

RECOVERING ECONOMY

Buffett, 79, is one of the world's most revered investors and is known for making big long-term bets. In October 2008, after the collapse of Lehman Brothers set off global selling, he wrote in The New York Times: "Fears regarding the long-term prosperity of the nation's many sound companies make no sense."

The deal, expected to close in the first quarter of 2010, comes as the U.S. economy begins to recover from its worst downturn since World War Two.

BNSF, the No. 1 U.S. railroad by revenue, operates in the U.S. West and Midwest. It said in September that freight volumes were recovering and it was encouraged by an improvement in consumer-related markets.

The deal really marks a bet on the future of coal, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.