Wednesday, November 4, 2009

Transport: Big Nothing on Santa Fe

TORONTO, ONTARIO - On Tuesday, Berkshire Hathaway announced a $26 billion outright purchase of the Burlington Northern Santa Fe Railway, whose operational unit has been legally known as just "BNSF" since 2005. The news has received wide attention in the financial press as it is the largest purchase ever by Berkshire Hathaway. I seem to be regarded as some sort of transportation analyst, as I have received many e-mails asking what this means for BNSF. The general consensus on the answer, with which I have no reason to disagree, is almost nothing.

BNSF was formed by a 1995 merger between the Burlington Northern and the Atchison, Topeka and Santa Fe Railways, two iconic names in United States railroading. With more than 32,000 route miles, the vast majority west of the Mississippi River, the line was the largest in the nation until the Union Pacific acquired Southern Pacific a year later in response. Since then, BNSF CEO's Robert Krebs and Matt Rose have been credited with prudent investment and general competence in running their railway, which remained much more fluid than its primary competitor during economic good times.

Berkshire Hathaway had already been investing in BNSF for some time, seeing in the financial numbers the same competence that industry observers have seen. Its stake had already reached 22% even before this week's news. While Berkshire Hathaway had invested in other railroads, most notably Union Pacific and Norfolk Southern, its largest stake had always been in BNSF.

Note that in addressing this acquisition, I refer to "Berkshire Hathaway" and not its primary investor Warren Buffett. While Buffett may be one of the richest people in the world and an iconic figure as chairman of Berkshire Hathaway, there is little reason to believe that he will take any kind of hands-on role at BNSF. Generally speaking, Berkshire Hathaway purchases companies in part for their quality management and then leaves them alone to run their business and make a profit that goes back to Berkshire Hathaway. There seems no reason to believe BNSF is going to be any different than Dairy Queen, Coca-Cola, Wrigley, Geico or any other company in which Berkshire Hathaway has significant investment.

So will BNSF have a new name? Unlikely. Will it paint its locomotives a different color, such as a return to the famous red and silver warbonnet of predecessor Santa Fe? Unlikely. Will its attitude toward Amtrak, toward which it has been regarded as a much better partner than other Class I railroads, change? Unlikely. Will it change its position on steam excursions over its lines? Unlikely. Will anything perceptible to the public change? Unlikely.

It is entirely possible that the only thing that will change at BNSF is that it will no longer pay dividends to investors, instead sending its profits to Berkshire Hathaway. This may also mean more freedom for BNSF in making long-term capital investments with a portion of those profits, an area in which it was already regarded as more proactive than its industry peers and which may make it even better-positioned for economic booms in the future.

Indeed, Buffett himself described this investment as an enormous "bet on the future of the United States," citing the relative fuel-efficiency of railroads for overland transportation. Some analysts think it is also a bet on continued imports from foreign countries, which usually move by rail from ports to their final destination regions, and on domestic coal, of which BNSF is a major carrier.

Whatever it is, there will be a lot of surprise if the Berkshire Hathaway acquisition makes much difference in the day-to-day operations of BNSF.


Kelly said...

Was just reading your daily post and then went to read our local paper and saw this story,

Thought you might enjoy Lance

Anonymous said...