Investor Warren Buffett is making what he calls an "all-in wager" on the U.S. economy -- $34 billion to buy a major railroad that hauls everything from corn to cars across the country.
Burlington Northern Santa Fe Corp., the nation's second-largest railroad, is the biggest hauler of such food products as corn, and coal for electricity, making it an indicator of the country's economic health. The railroad also ships a large amount of consumer goods -- including items imported from Asia -- from big Western ports such as Los Angeles and Seattle.
Analysts say that Buffett is planting both feet in an industry that is poised to grow as the economy gets back on solid ground. It would be the biggest acquisition ever for Berkshire Hathaway Inc.
Berkshire Hathaway already owns about 22 percent of Burlington Northern, and it will pay $100 a share in cash and stock for the rest of the company. That was 31.5 percent premium on Burlington Northern's Monday closing price. The stock shot up over 28 percent yesterday, to $97.66 in afternoon trading.
Shareholders have the option to convert their stock for a cash payment of $100 a 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.
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 instead of cash. The Class B shares rose $67.20, or 2.1 percent, to $3,332.23 yesterday.
Berkshire owns stock in two other major railroads -- about 1 percent of the outstanding shares of Union Pacific Corp. and less than 1 percent of Norfolk Southern Corp., as of June 30. Buffett started investing in railroads in 2007, but he has said he realized a few years late that railroads had become an appealing investment.
He says he thinks that railroads are a key economic indicator because of the amount of goods they haul across the country. "They do it in a cost-effective way and extraordinarily environmentally friendly way," he told CNBC.
Last week Burlington Northern reported that its third-quarter profit fell 30 percent from a year earlier. Burlington Northern made almost a third of its money in the last quarter from shipments of consumer products from the West to such major hubs as St. Louis, Kansas City and Chicago.
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