Buffett's big bet: $34B on 2nd-largest railroad

The biggest name in investing is making what he calls an "all-in wager" on the U.S. economy - $34 billion to own a railroad that hauls everything from corn to cars across the country.

The acquisition of Burlington Northern Santa Fe, the nation's second-largest railroad, would be the biggest ever for Warren Buffett's Berkshire Hathaway investment company.

It's a natural fit for the Oracle of Omaha, a city with a special place in railroad history. It was the starting point for the westward push of the transcontinental railroad. Today, Omaha is the headquarters of Union Pacific, and BNSF trains rumble through every day.

In a statement, Buffett, whose investing decisions are carefully scrutinized by the world of finance, voiced confidence in the railroad industry.

"Most important of all, however, it's an all-in wager on the economic future of the United States. I love these bets," he said Tuesday.

Berkshire Hathaway Inc. already owns a 22 percent stake in Burlington Northern and would buy up the rest under the deal, for a total value of $34 billion. It still needs approval from Burlington shareholders and antitrust regulators, both expected early next year.

Burlington Northern is the biggest hauler of corn and coal for electricity, making it an indicator of the country's economic health. It also carries everyday items such as refrigerators, clothing and TVs from Western ports like Los Angeles and Seattle.

Berkshire will pay $100 a share in cash and stock for the rest of the company, more than a 30 percent premium on the Monday closing price of Burlington Northern shares. Shareholders will have the option of a $100 cash payment per share or common stock in Berkshire.

Burlington Northern Santa Fe Corp. stock shot up $20.93, or 27 percent, to $97 on Tuesday. Stock in other rail companies rose as well. Berkshire owns a 2 percent stake in Union Pacific's stock and a less-than-1 percent stake in Norfolk Southern.

Buffett has said he realized a few years late that railroads were an appealing investment. As diesel prices rise, shipping by rail instead of truck becomes more attractive, and it would be extremely difficult for a competitor to build a new railroad.

"They do it in a cost-effective way and extraordinarily environmentally friendly way," Buffett told CNBC on Tuesday. "I basically believe this country will prosper and you'll have more people moving more goods 10 and 20 and 30 years from now, and the rails should benefit. It's a bet on the country, basically."

Burlington Northern made about 31 percent of its money last quarter from shipments of consumer products from the West to major hubs like St. Louis, Kansas City and Chicago.

Its next most important segment was coal, followed by industrial products like farm equipment, lumber and chemicals. It also hauls corn, wheat and soybeans, much of it exported to China. Burlington Northern serves more of the nation's major grain-producing regions than any other railroad.

Burlington Northern also hauls trains full of retail merchandise imported from Asia and imported cars from manufacturers like Toyota and Honda.

Burlington itself, however, is among the least optimistic of the major railroads about the pace of economic recovery. Last week it said third-quarter profit dropped 30 percent from a year earlier; people resisted buying retail goods and industrial production struggled.

Coal shipments to power plants have fallen off sharply because of lower electricity demand. Burlington Northern hauls enough coal to power one out of every 10 homes in the U.S.

Still, the coal hauled by Burlington Northern is mined from places like the Powder River Basin in Wyoming and Montana and is lower in sulfur than the coal in the eastern U.S., making it cleaner and in higher demand these days.

An average Burlington Northern train hauls as much freight as 280 trucks. Rails are also favored by some shippers because they can carry things that can't travel on highways, like hazardous chemicals. Buffett's Berkshire already owns major utilities that rely on coal through its MidAmerican Energy Holdings Co. Analysts say he is looking for an investment that will reap rewards many years into the future, and isn't so concerned about immediate gains.

The billionaire is "buying at the trough - things aren't going to get much worse. He's getting in at a good time," said Art Hatfield, an analyst with investment firm Morgan Keegan.

Hatfield said he believes Buffett went for Burlington Northern in part because of its strong management team and because Burlington Northern has been more aggressive than its peers in developing new technology, making it more profitable.

Major railroads have been able to slash costs during the recession by cutting jobs, parking railcars, improving train speeds and making other moves that improved efficiency.

Before this, Berkshire's biggest acquisition was the $16 billion stock purchase of reinsurance giant General Re, announced in 1998. Last fall, he plowed $5 billion into Goldman Sachs, in a vote of confidence in the financial system.

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AP Business Writers Josh Funk in Omaha, Neb., and Deborah Jian Lee in New York contributed to this report.