graph headline: An elephant-sized acquisition

Slug: BIG DEAL, BIGGER BAILOUT
Headline: Buffett in $44 bn
Burlington deal
Andrew Frye & Hugh Son
New York
Warren Buffett's Berkshire Hathaway Inc agreed to buy railroad Burlington Northern Santa Fe Corp in the company's biggest takeover.
Buffett's firm will pay $26 billion, or $100 a share in cash and stock, for the 77.4% of the railroad it doesn't already own. Including his previous investment and the assumption of debt, the value of the deal is about $44 billion, Omaha, Nebraska-based Berkshire said in a statement on Tuesday. That compares with the railroad's closing price of $76.07 on Monday.
"It's an all-in wager on the economic future of the United States," Buffett said in the statement.
Berkshire has been building a stake in the Texas-based railroad for more than two years as Buffett looked for what he called an "elephant"-sized acquisition in which he could deploy his company's cash hoard, valued at more than $24 billion as of the end of June. Trains stand to become more competitive against trucks with fuel prices high, he has said.
"It is Warren being Warren, taking advantage of a market that is soft at a time when the possibility for competitive bids is relatively low," said Tom Russo, a partner at Gardner Russo & Gardner. "He looks at this as a business that has advantages against other forms of transportation."
At $100 a share, Buffett is paying 18.2 times Burlington's estimated 2010 earnings of $5.51, according to the average analyst projection in a Bloomberg survey. That compares with the 13.4 multiple for the Standard & Poor's 500 Index as of Monday's close. Burlington Northern shares have dropped 13% in the 12 months through Monday.
Competing railroad Union Pacific Corp's ratio was 13, while Jacksonville, Florida-based CSX Corp's was 13.1, Bloomberg data show.
The deal culminates a search by Buffett, 79, that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and vice-chairman Charles Munger couldn't find companies they considered large enough to meaningfully add to annual earnings.
Buffett needs "elephants in order for us to use Berkshire's flood of incoming cash," he said in his annual letter to shareholders in 2007. "Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game."
Buffett will use $16 billion in cash for the deal, half of which is being borrowed from banks and will be paid back in three annual installments, he told the CNBC television network.
Berkshire will have more than $20 billion in consolidated cash after the purchase, he said.
"It doesn't mean we're out of business, but it does mean that we won't be making any huge deals for a while," Buffett told the network. Bloomberg



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