Buffett bags his elephant

Posted by Mark Bunting on November 3, 2009

For over two years, Warren Buffett roamed the wilds of the financial landscape stalking prey.

But the world's most successful investor wasn't looking to mount a mouse head on his wall. He wanted an elephant's. After all, he had a $24-billion US cash pile at his disposal.

So when Buffett, the big game hunter, finally pulled the trigger, it was like he put a foot on his prize catch, posed for the cameras and exclaimed, "It's an all-in wager on the economic future of the United States."

Once accused of missing out on the tech boom, Buffett looked to yesterday’s still thriving mode of transportation for today’s big deal. Berkshire Hathaway’s offer for rail operator Burlington Northern Sante Fe values the company at $44 billion including debt.

But, why a rail company, at this time?

Buffett has always been a long-term thinker. He's never cared much for the daily permutations of the markets or economy. Buffett believes the U.S. will again prosper once the rubble of the financial crash has been cleared. In explaining the deal, he says: "Our country’s future prosperity depends on its having an efficient and well-maintained rail system." And Buffett plans to have his newest acquisition provide a large portion of that system. In a television interview after the deal was announced he said: "We'll have more people moving more goods 10, 20, 30 years from now."

Burlington is the largest rail company in the U.S. operating 32,000 miles (51,500 kilometres) of track with 67,000 locomotives. It's the largest transporter of grain and ships fertilizer, with annual volumes that could cover all of Kansas. The company also transports a significant amount of clean coal.

Another selling point for Buffett is that, as energy prices rise, Burlington could gain business because rail companies will incur lower costs for diesel fuel than trucking companies. That has helped rail operators during the recession maintain reasonable pricing power.

Berkshire Hathaway is still sitting with about $20 billion in cash but Buffett says his company won't be making any huge deals for a while. That's because, like a lion basking in the shade after a good meal, Buffett has satiated, for now, his desire for an elephant.

 

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