(Updates with details on Buffett's past investments, analyst comments.)
By Lavonne Kuykendall
Of DOW JONES NEWSWIRES
Berkshire Hathaway Inc.'s (BRK.A, BRK.B) acquisition of Burlington Northern Santa Fe Corp. (BNI) is classic Warren Buffett: A bet on an easily understandable company with high barriers to entry and a dependable, if economically sensitive, business.
What makes it different from some recent investments by Buffett is that he isn't acquiring the railroad at a steep discount.
"It doesn't look like he got this on the cheap," compared to more "opportunistic" financial deals he did with Goldman Sachs (GS) and General Electric Co. (GE), said Catherine Seifert, an equity analyst with Standard & Poor's.
Buffett's bet on Burlington Northern values the entire company at $34 billion, plus $10 billion in debt, and offers shareholders the option of trading in their Burlington shares for shares of Berkshire Hathaway. The deal, structured with 60% in cash and 40% in Berkshire Hathaway stock, is his biggest deal ever, and the first in more than 10 years to include stock.
Buffett said Tuesday the deal is an "all-in wager on the economic future of the United States," given how rail shipping is heavily influenced by the economy. In an interview with The Wall Street Journal, Buffett said the investment, though "a huge bet and one that I'm very happy to make," still isn't "a bet on next month or next year," but rather a long-term play.
The deal also provides a benefit to Burlington Northern, in that it reduces its cost of capital as it becomes part of Berkshire Hathaway.
Once the acquisition closes in early 2010, it should immediately boost Berkshire Hathaway's earnings, by roughly 10% annually, said Cliff Gallant, an analyst with Keefe, Bruyette & Woods.
Burlington Northern, of which Berkshire Hathaway already owned 23%, represents an investment by Buffett in the simpler, old-fashioned businesses he has said he likes.
"If there's lots of technology, we won't understand it," Buffett said in his 2008 shareholder letter of his wish list for preferred acquisitions.
The "needle-moving" deal potentially changes the profile of Berkshire Hathaway from an insurance-based conglomerate heavy on financial services investments to more of an industrial manufacturer, S&P's Seifert said.
"What is this telling us about his feeling about investing in financial services, when his big bet is outside financial services?" she said.
Berkshire Hathaway already has rail-related holdings, besides its prior stake in Burlington Northern. Last year, it acquired a majority stake in Marmon Holdings Inc., which manufactures railroad tank cars and other heavy equipment, among other businesses, and operates 250 manufacturing, distribution and service facilities.
Berkshire Hathaway also owns a majority stake in MidAmerican Energy Holdings, an energy distributor that uses coal transported mostly by train for about half its generation capacity.
The deal comes as Berkshire Hathaway is expected to post strong earnings Friday, after the market closes, buoyed by returns in its insurance and reinsurance businesses. Last year the company's net worth dropped by $11.5 billion, driven by a $7.5 billion loss on its derivatives holdings.
Last year, "people were worried" about Buffett's financial strength and the liquidity of his company, said Keefe, Bruyette & Woods' Gallant. Now, "a statement is being made about his own position."
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@dowjones.com