Buffett Says Burlington Purchase ‘Not a Bargain’ for Berkshire

Buffett Says Burlington Purchase ‘Not a Bargain’ for Berkshire


Nov. 14 (Bloomberg) -- Berkshire Hathaway Inc.’s Warren Buffett, who agreed to buy Burlington Northern Santa Fe Corp. in his biggest takeover, said the railroad’s results in the next 100 years will justify a $26 billion bid that’s “not a bargain.”

“It’s a good asset for Berkshire to own over the next century,” Buffett said in an interview with Charlie Rose to be broadcast yesterday on PBS. “You don’t get bargains on things like that. It’s not cheap.”

Buffett is borrowing about $8 billion and risking Berkshire’s AAA credit rating at Standard & Poor’s to buy the railroad in what he calls an “all-in wager” on the future of the country’s economy. The stock-and-cash bid, announced on Nov. 3, values Fort Worth, Texas-based Burlington at $100 a share, 31 percent more than its closing price the day before.

“It was an opportunity to buy a business that’s going to be around for 100 or 200 years that’s interwoven with the American economy in a way that, if the American economy prospers, the business will prosper,” Buffett said.

Buffett is investing Omaha, Nebraska-based Berkshire’s $26.9 billion cash as the U.S. shows signs of pulling out of recession. The U.S. economy returned to growth in the third quarter, expanding at a 3.5 percent pace, according to the Commerce Department.

Goldman, General Electric

Last year, as stocks plunged and credit markets froze, Buffett extended financing to firms including Goldman Sachs Group Inc. and General Electric Co., and he agreed to buy Constellation Energy Group Inc. The Constellation deal was scuttled after a competing bid from Electricite de France SA trumped Berkshire.

Buffett agreed to pay 18.2 times Burlington’ estimated 2010 earnings of $5.51 a share, according to the average analyst projection in a Bloomberg survey before the deal was announced. That compares with the 13.4 multiple for the Standard & Poor’s 500 Index as of Nov. 2.

“The company wasn’t egregiously cheap,” said Guy Spier, a principal at hedge fund Aquamarine Funds LLC, which owns Berkshire shares. “It could be five years before the logic of Burlington Northern” becomes clear, he said.

Buffett, the second-richest American, built Berkshire by buying out-of-favor stocks and acquiring companies with what he says are enduring advantages over competitors. Berkshire, with units that sell insurance, energy, ice cream and underwear, posted two straight profit gains after its worst loss in at least 20 years in the first quarter.

‘Good Investment’

Buffett said he had “already sold” Berkshire’s stakes in Burlington’s competitors. His company owned about 9.56 million shares of Union Pacific Corp. and 1.93 million shares of Norfolk Southern Corp. as of June 30, according to a regulatory filing.

“I’ve done that just to facilitate the transaction,” Buffett said. “I think they are good investments. I would have held them had this hadn’t happened.”

Buffett said he also has a toy railroad set in his attic, adding “I hope they don’t make me sell it for antitrust reasons.”

The interview will be rebroadcast on Bloomberg Television on Nov. 16.

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