Street Capitalist: Event Driven Value Investments

Wow! Big news this morning. Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) is set to acquire Burlington Northern Santa Fe (NYSE:BNI)

Berkshire Hathaway Inc. said it will acquire the 77% of Burlington Northern Santa Fe Corp. it doesn’t already own in a cash and stock deal that values the railroad company at $34 billion and marks Warren Buffet’s largest acquisition.

The deal values Burlington Northern at $100 a share, a 31% premium to Monday’s closing price.

“Berkshire’s $34 billion investment in BNSF is a huge bet on that company, Chief Executive Matt Rose and his team, and the railroad industry,” Mr. Buffett said in prepared statement. Berkshire also will assume $10 billion of outstanding Burlington Northern debt.

“Most important of all, however, it’s an all-in wager on the economic future of the United States,” Mr. Buffett said. “I love those bets.”

The deal provides that each Burlington Northern share will be at the election of the shareholder to be converted into the right to receive either a cash payment of $100 or a variable number of Berkshire’s Class A or Class B stock.

The deal is expected to close in the first quarter.

Separately, Berkshire’s board approved a 50-for-1 split of its Class B stock. The company said a great majority of the stock issued by Berkshire in the acquisition would be its “A” shares, but “B” shares will also be needed to accommodate holders of smaller amounts of Burlington Northern’s shares who opt for a share of exchange rather than a cash payment.

Berkshire to Acquire Burlington Northern (WSJ)

The really interesting thing here is that Buffett is set to use Berkshire shares for the acquisition. I can’t remember the last time that he did this, I know he really regretted it with Dexter Shoe Co.:

In 1993, Berkshire paid $433 million for the Maine-based company. Rather than use cash, Buffett used Berkshire Class A stock to fund the purchase. That Berkshire stock is worth eight times more now, giving the Omaha, Nebraska-based insurance and investment company a $216 billion market value.

Dexter didn’t make it that long. It ended shoe production in the United States and Puerto Rico in 2001, and Berkshire folded what was left into its H.H. Brown Shoe Group unit.

“What I had assessed as durable competitive advantage vanished within a few years,” Buffett wrote on Friday. “By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6 percent of a wonderful business — one now valued at $220 billion — to buy a worthless business.”

“To date, Dexter is the worst deal that I’ve made,” Buffett went on. “But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.’”

Buffett calls Dexter Shoe his worst deal ever (Reuters)

I know some people think that the capital expenditures of railroad companies are likely to be limited in the future as much of the track has been already laid. Most capex would then go to maintenance, with the rest being gravy for the owner. This could be a big motivator for Buffett changing his mind on railroads and becoming so bullish.