Stock Analyst Notes
by Keith Schoonmaker | 11-03-09 | 9:07AM |
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On Tuesday, Berkshire Hathaway BRK.B announced its intention to acquire the remaining outstanding shares of Burlington Northern Santa Fe BNI for $100 per share, which is a 31.5% premium to Monday's $76.07 closing price and 11.1% greater than our $90 per share fair value estimate. This $44 billion acquisition (including $10 billion of outstanding BNSF debt) is Berkshire Hathaway's largest to date and comprises the remaining 77.4% of the railroad not currently owned, topping off the position the firm began to amass about four years ago. Purchase terms are 60% cash and 40% stock consideration, with shareholders able to elect the form of consideration they receive in order to maximize tax efficiency.
We think Berkshire Hathaway CEO Warren Buffett values railroading for its bulletproof economic moat via nearly irreplaceable rights of way, a predictable business model, economic efficiency, and strong free cash flow despite heavy demand for capital investment. In our opinion, BNSF is particularly attractive because of its size (it edged out Union Pacific UNP to become the largest Class I railroad in 2008), which, when paired with outstanding free cash flow as a percentage of revenue, generates significant cash for Berkshire to redeploy in additional acquisitions. We think Buffet values what we like in BNSF: stable management and tracks to its leading coal and intermodal franchises. We maintain our opinion that two railroads is the optimal structure for North America, but the Class I rail merger moratorium is still in effect (Kansas City Southern KSU is exempt), so Berkshire cannot add other large rails to its portfolio under present conditions.
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