Buffett to buy Burlington Northern

The deal, Buffett's biggest-ever acquisition, marks new 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.

The deal is priced at a premium of 31.5 percent over BNSF's closing stock price on Monday and values the railroad at $34 billion. BNSF shares jumped 28 percent in morning trading; other U.S. and Canadian rail companies also rose.

"It's an all-in wager on the economic future of the United States," Buffett said in a statement, adding railroads will benefit in a recovery. "I love these bets."

Reversing his long-time opposition to share splits, which has resulted in the highest per-share price of any stock on the New York Stock Exchange, Buffett agreed to a 50-for-1 split of Berkshire's Class B shares, which will make the stock 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. Both were up about 1.5 percent.

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

Berkshire will pay $100 per share in cash and stock for the 77.4 percent of BNSF shares it does not already own, and will also assume $10 billion of BNSF debt. It will pay about $16 billion in cash and the rest in stock. Of that $16 billion, it will pay $8 billion from its own cash.

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.

Berkshire's biggest holdings include insurers like Geico, although it has close to 80 operating units that provide such products as carpeting, 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."

The deal, expected to close in the first quarter of 2010, comes as the U.S. economy is beginning to recover from its worst downturn since World War Two. U.S. gross domestic product grew at a 3.5 percent annual rate in the third quarter, the first quarterly growth in more than a year.

RECOVERING ECONOMY

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.

"Berkshire is seeing way past some impending economic recovery signs now and looking into the future," said Peter Boockvar, equity strategist at Miller Tabak + Co in New York.

U.S. railroads in recent years have invested in new technology and improved the efficiency of operations, while arguing their method of transport is cheaper and cleaner than shipping goods by truck.

Buffett told CNBC television the deal came together quickly. "I made (BNSF CEO Matt Rose) an offer and he said he would take it to his board and it took about 15 minutes," he said.

He added, "We won't be making any huge deals for a while."

With Berkshire's support, BNSF will be able to invest in its infrastructure and not have to worry about meeting quarterly expectations, said Thomas Russo, a partner with Gardner Russo & Gardner in Lancaster, Pennsylvania, which counts Berkshire as its second-largest holding.

RAILS RALLY