Buffett buys up Burlington Northern and does 50-1 split at Berkshire
Warren Buffett’s Berkshire Hathaway has been making some very significant moves of late. Selling of Moody’s shares is one. But, the latest is sure to cause a stir amongst Buffett watchers because he is definitely making some “bets” on economic recovery with his purchase of Burlington Northern Santa Fe (BNI). It is unclear as yet what precipitated the share split (Hat tip Roula).
The boards of directors of Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) and Burlington Northern Santa Fe Corporation (BNSF; NYSE: BNI) today announced a definitive agreement for Berkshire Hathaway to acquire for $100 per share in cash and stock the remaining 77.4 percent of outstanding BNI shares not currently owned to increase its holdings to 100 percent. Based on the number of outstanding BNI shares (including shares currently owned by Berkshire) on Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt, making it the largest acquisition in Berkshire Hathaway history.
“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. “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,” said Mr. Buffett. “I love these bets.”
Railroad freight traffic is often used as a proxy for aggregate demand in the economy when looking for substitutes to government measures of GDP or consumption. So, clearly Buffett is making a bet on American prosperity going forward as the last paragraph I quoted says.
However, the announcements today at Berkshire were a twofer as Berkshire also announced a 50-1 stock split. Berkshire couches the rationale for the split in terms of making the transaction viable for small stockholders of Burlington Northern Sante Fe, but I suspect there is a bigger plan. The press release on Berkshire’s site says:
The great majority of the stock issued by Berkshire in the BNSF acquisition announced today will be “A” shares. “B” shares, however, will also be needed to accommodate holders of smaller amounts of BNSF shares who opt for a share exchange rather than a cash payment.
By splitting Berkshire “B” shares 50-for-1, we can accommodate even the smallest holdings of BNSF shares that elect a tax-free exchange.
Berkshire Hathaway “A” shares last traded for a massive $98,750.00, putting it clearly out of reach for the average retail investor except through participation in a fund. Berkshire created the B-class of shares to accommodate more retail-oriented investors. So, I suspect this is a move to put “B’ shares further into the reach of retail investors. The B-shares last traded for $3,265, so a 50-1 split puts them at $65.30, a price any retail investor would find reasonable.