Legendary investor Warren Buffett agreed to the biggest acquisition in his career. Buffett's Berkshire Hathaway inked a deal to purchase the shares of Burlington Northern Santa Fe (BNSF) that it doesn't already own for $100 a share in stock and cash. The pric
e represents a 21 percent premium to BNI's Monday closing price.
In a statement announcing the acquisition, Buffett said "Our country's future prosperity depends on its having an efficient and well-maintained rail system. Conversely, America must grow and prosper for railroads to do well. Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry."
"Most important of all, however, it's an all-in wager on the economic future of the United States," Buffett said. He added "I love these bets."
Analysts said that Buffett's move was "Warren being Warren." Buffett's big cash stake allowed him to move in while the market is relatively weak and while other potential bidders would possibly face problems obtaining financing. In addition, Buffett sees BNSF as a company with competitive advantages over others in its sector. He also sees the sector as one that has advantages over other modes of transportation.
Some analysts are concerned by Buffett's move, saying that he is paying too much for BNSF. The $100 a share price that Buffett will pay results in a P/E ratio of 18 times projected 2010 earnings. Competitors like CSX and Union Pacific are trading at around 13 times earnings. And the S&P 500 as a whole, which some say is overvalued, is trading at 13.4 times earnings.
However, Bloomberg did a breakdown of just the assets that BNSF owns. The result? Just to replace the capital assets that BNSF owns would cost around $180 a share, so the $100 a share that Buffett is paying is well below that figure. On top of that, BNSF is a cash generating machine, Even in a down economy, it generated $1.1 billion in free cash flow during the recently concluded third quarter.
In the end, Buffett's move is a classic move by the legendary investor. He is taking advantage of market inefficiencies to acquire an asset at a price that he feels is a bargain and putting his huge cash stake to use.
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In a statement announcing the acquisition, Buffett said "Our country's future prosperity depends on its having an efficient and well-maintained rail system. Conversely, America must grow and prosper for railroads to do well. Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry."
"Most important of all, however, it's an all-in wager on the economic future of the United States," Buffett said. He added "I love these bets."
Analysts said that Buffett's move was "Warren being Warren." Buffett's big cash stake allowed him to move in while the market is relatively weak and while other potential bidders would possibly face problems obtaining financing. In addition, Buffett sees BNSF as a company with competitive advantages over others in its sector. He also sees the sector as one that has advantages over other modes of transportation.
Some analysts are concerned by Buffett's move, saying that he is paying too much for BNSF. The $100 a share price that Buffett will pay results in a P/E ratio of 18 times projected 2010 earnings. Competitors like CSX and Union Pacific are trading at around 13 times earnings. And the S&P 500 as a whole, which some say is overvalued, is trading at 13.4 times earnings.
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However, Bloomberg did a breakdown of just the assets that BNSF owns. The result? Just to replace the capital assets that BNSF owns would cost around $180 a share, so the $100 a share that Buffett is paying is well below that figure. On top of that, BNSF is a cash generating machine, Even in a down economy, it generated $1.1 billion in free cash flow during the recently concluded third quarter.
In the end, Buffett's move is a classic move by the legendary investor. He is taking advantage of market inefficiencies to acquire an asset at a price that he feels is a bargain and putting his huge cash stake to use.
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