Tuesday, November 3, 2009

Buffett to buy BNI, pays a full and fair price (BNI, BRK.A, BRK.B)

Warren Buffett's Berkshire Hathaway announced a deal to purchase the 77.4% of Burlington Northern Santa Fe (BNI) he doesn't already own, for $100 per share. That represents a healthy 32% premium to the railroad's closing price yesterday. BNI shares are trading premarket at $98, just below the offer.

From the release:

“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.”

The deal's terms give BNI shareholders the choice of receiving $100 in cash or a portion in both cash and Berkshire (BRK.A, BRK.B) shares.

Concurrently, Berkshire will split it's B shares 50-1, to help with the exchange offer to BNI shareholders:

"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."

Buffet is paying about 18times 2010 earnings and based on those earnings, about a 5.5% Free Cash Flow Yield -->> a full and fair price, but that should be expected if you want owners to part with this iconic company with big time real estate assets.

Not hurting Buffet is the $1.7billion boost to his portfolio due to the 76.7million BNI shares he already owns jumping 29% this morning.

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