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Buffet’s Big Rail Buy- A Man Who Understands Economic Forces

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Both the financial and supply chain worlds have been abuzz today regarding the blockbuster announcement that Warren Buffet’s Berkshire Hathaway Inc. has entered into a definitive agreement to acquire the Burlington Northern Santa Fe (BNSF) railroad in an acquisition estimated to be roughly $34 billion in value. Berkshire already owned 22 percent of BNSF, and today’s announcement, when consummated, will make Buffet the sole owner of 100% of the shares in this railroad.

From my view, this announcement has two significant headlines, one financial and one supply chain in scope.

Financially, at $34 billion, it represents, to-date, the largest acquisition in size made by Berkshire in its investment portfolio.  Berkshire’s $16 billion acquisition in 1998 of reinsurance company General Re held the former title.  Buffett also has a tendency to stray away from very large acquisitions because of his views on messy marriages among targets.  He prefers, instead, to incrementally invest in ongoing enterprises that have a unique or attractive upside potential in their industry or market segments.

The supply chain headline however is what Buffet stated this morning in his media interviews, his huge bet on the future of the United States and consequent needs for more efficient transportation infrastructure.  In the case of railroads, it is the reality that the compelling forces leading to the eventual return of high fossil-fuel prices, coupled with alternative energy realities, will make rail the most efficient alternative for moving goods across the country BNSF is in a great position to leverage these economic forces

BNSF has much to offer and closely fits Buffet’s investment criteria including: 

  • A competent and visionary senior management team managing the railroad. BNSF’s productivity gains lead the railroad industry.
  • Strategic routes focused on the movement of key commodities.  BNSF serves the majority of the U.S. major grain producing regions. A quarter of its revenue is derived from shipping bulk coal, but more importantly, it is the low-sulfur, cleaner burning coal mined in Wyoming and Montana, that is shipped East or to export markets.
  • BNSF, by the location of its route structure, is a major provider of intermodal services involving ocean containers transported across the country by rail.

 

Many Wall Street financial analysts and other industry observers are weighing in from a longer-term perspective, this investment in BNSF makes a lot of sense.  Some even view it as a ‘can’t miss’ investment. As Tony Hatch, principal of ABH Consulting stated, it is not only a bet on the heartland but on globalization.

I myself embrace the broader view.  Buffet understands and pays close attention to long-term economic trends and he’s made a big-bet on the future of efficient transportation infrastructure for the U.S.  Having Buffet leading the charge for a more efficient U.S. rail system, in my lens, is a plus for America. Supply Chain Matters has at least a year ago, posted commentary regarding the lack of a comprehensive U.S. transportation infrastructure strategy.

I will make a prediction that there may be more transportation infrastructure investments in the coming years as the eventual BNSF business strategy begins to unfold.  If Buffet sees a future in making money on transportation, why not others?

Let’s not forget that Warren has been touted to be a “key economic and business advisor” and if Warren feels the railroads are critical to long-term U.S. economic strategy, can Washington be far behind?

 Bob Ferrari

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