Buffett buys railroad in wager on economy

Warren Buffett said Tuesday that he is making a big bet on the economy with Berkshire Hathaway’s $34 billion deal to buy Burlington Northern Santa Fe.

But his biggest deal to date, for the nation’s second-largest railroad, may also be an environmental bet - on the future of coal and the fuel efficiency of rail transport.

Mr. Buffett, one of the world’s wealthiest men, described the purchase as an “all-in wager on the economic future of the United States.”

The railroad business is highly dependent on the economy as fewer goods are transported in hard times. At the same time, many investors see increasing competitive advantages for rail over trucks.

Mr. Buffett’s Berkshire Hathaway holding company in Omaha, Neb., said Tuesday that it would pay $26 billion, or $100 a share in cash and stock, for the 77.4 percent of Burlington Northern it doesn’t already own. Burlington Northern’s shares, which closed at $76.07 on Monday, jumped 28 percent to $97. Other rail stocks also surged.

Frank O’Donnell, president of Washington environmental advocacy group Clean Air Watch, said of Burlington Northern that “coal is their biggest profit center.”

He called the deal “the biggest climate story of the day,” more significant than “the psychodrama being played out” in the Senate Environment and Public Works Committee headed by Sen. Barbara Boxer, California Democrat. He was referring to the bitter debate on the Kerry-Boxer climate change bill, sponsored by Mrs. Boxer and Sen. John Kerry, Massachusetts Democrat.

Mr. Buffett’s move “may show that there is a discrepancy between political rhetoric in Washington and what’s happening in the real world, where the guy who’s believed to be the world’s savviest investor is putting a big bet on coal,” Mr. O’Donnell said.

“If he’s right, it may be very hard to meet our climate goals,” he said.

Burlington Northern spokesman John Ambler said coal accounts for a quarter of the railroad’s revenues.

“It’s significant to us, and when it comes to climate change legislation there are pluses and minuses for the railroad,” he said.

“If it has an impact on coal, there’s a concern about what that does, but the other side is that we are much more fuel-efficient than other means of transporting freight, with less carbon impact,” Mr. Ambler said.

He said he couldn’t speak to Mr. Buffett’s views on coal, and Mr. Buffett did not speak directly to reporters about the deal.

“It is our impression that they share some of our perspective that with fuel efficiency and the environmental advantage of shipping by rail, and the growth in the market for shipping by rail, that rail has a very promising future and the potential for market growth is substantial in coming years,” he said.

Mr. Buffett told investors at his 2007 annual shareholders meeting that he expected rail to take business from trucks because of the industry’s lower sensitivity to rising diesel fuel prices.

Thomas A. Russo, a partner at Gardner Russo & Gardner in Lancaster, Pa., said coal isn’t going away any time soon. His firm owns more than $300 million in Berkshire stock, which is one of the firm’s top two holdings at 11 percent of assets.

“The fact of the matter is that coal is already and will have to be a very large piece of the energy solution because it is environmentally manageable if they use the scrubbing and the sequestration, and it is abundant in a politically secure place,” he said.

“[Mr. Buffett] knows the coal industry because he owns the utility businesses,” Mr. Russo said, referring to Berkshire’s MidAmerican Energy Holdings subsidiary, which owns seven electric and gas utilities.

Mr. Buffett’s economic optimism won’t have much impact on the stock market because of his investment in Goldman Sachs last year, Mr. Russo said. After Mr. Buffett’s vote of confidence, Goldman shares plummeted.

Shares of the largest U.S. investment bank have roared back this year, and Mr. Buffett now has made billions of dollars on the investment.

The overall deal with Burlington Northern is valued at $44 billion, which includes Mr. Buffett’s earlier investment and the assumption of $10 billion in debt, according to Berkshire.

Burlington Northern Chairman and Chief Executive Officer Matthew Rose said the sale was a “strategic fit” for the railroad’s employees and customers.

Mr. Buffett has long been known to be looking for what he called an “elephant”-sized acquisition as Berkshire’s $156 billion market capitalization made smaller investments impractical. Berkshire had more than $24 billion in cash as of the end of June.

Berkshire’s board approved a 50-to-1 split of the company’s Class B shares as part of the deal, the company said. The move is for the benefit of Berkshire’s smallest investors who elect for a tax-free swap of the railroad’s stock, Berkshire said.