Warren Buffett has done it again; revealed a deal that defines his optimism in America’s future, makes an emphatic statement about the financial strength of his Berkshire Hathaway company and gives a poke in the eye to all the gainsayers who were saying a year ago that he was under pressure and could be badly damaged by the financial crunch and recession.
Well he’s been so badly damaged that potentially he helped save Goldman Sachs and General Electric in the depths of the crunch, and has spent the best part of $US40 billion ($A44.3 billion) expanding his empire and getting above average and market returns on the deals. In all respects, Buffett has had a very good crisis.
Overnight he revealed his latest and biggest-ever deal, spending $US26.6 billion to buy the 77%-78% he doesn’t own of Burlington Northern and Santa Fe, America’s second biggest railroad. It’s a deal that is an out-and-out bet on the future of coal as America’s major source of electrical power for decades to come and a bet that the American economy will recover to something approaching its pre-crunch glory. It values the total rail group, including debt at $US44 billion.
It could be one of those deals that helps lift America’s flagging confidence because of Buffett’s wide appeal to Americans of all types as a great American hero. (He’s not a banker).
It is also a bet that Australia will find encouraging, with our heavy dependence on carbon in our exports and economy.
Some US commentators have claimed it is also a punt on new clean coal technologies coming to the fore in the next decade (Buffett may not be around to see that). It also gives de facto support for some sort of emissions/carbon trading and control system. For a country the size of the US, it is also a punt on rail becoming a dominant mode of transport when compared to road, which has a higher carbon use and footprint.
It will not send the sorts of messages on renewables that the greens and other will like. His investment will be seen by climate-change sceptics as giving support to their belief that nothing much is going to change.
But that will be wrong. It is actually a bet that, whatever system of carbon control and reduction America adopts, the cost of carbon will rise, making trucking more and more expensive, and in turn helping rail to become more attractive as a transport mode, especially over shorter distances.
So even if coal carriage falls as less is consumed, more general cargo, grain, etc, will be carried on Burlington.
But Burlington will still be carrying lots of coal every year for years to come, plus some oil and other products. It is also a huge grain carrier (food), as well as cars and other consumer and industrial goods.
More than a quarter of its $US10.7 billion in revenues in the first nine months of this year comes from coal transported from the huge Powder River Basin coal mining complex in Wyoming and Montana to power stations across the middle, south and west of the country.
And with coal powering for just over half America’s electricity, it is not going to go away quickly, no matter what the greens and others think or claim.
According to Burlington’s website, the coal it hauls generates more than 10% of America’s electricity, with 50 of the most efficient and lowest-polluting stations on top of that list.
And Burlington has other assets: its track networks and rights of way are positioned to benefit from any expansion of US coal-fired electricity generation in the next 20 years, coupled with clean-coal technology to help curb CO2-dioxide emissions. Power stations could be built next to its rail networks, so long as multistate distribution systems can be built, which has been a big restriction in recent years.
That might be all well and good, but for greens and others, it’s coal, full stop. But it is the reality in the US.
The deal is Buffett’s biggest-ever takeover and involves cash and shares in Berkshire Hathaway worth $US100 for each Burlington share
It’s the first time in a decade Buffett has offered shares in a takeover; his many other deals have been all cash, so he will have more shareholders to accommodate in Omaha at next May’s annual meeting.
It is also the latest in a string of deals done during the current recession and crisis that has seen him lock up some enormous gains: He owns billions of dollars of debt (paying 10% or more) and shares in some of the following groups, Wrigley, Dow Chemical, Goldman Sachs, General Electric, Harley Davidson and Tiffany’s, the luxury jewellery group (Buffet’s Berkshire is actually America’s biggest jewellers).
In some respects, Buffett was a lender of first-and-last resort for these companies that needed to money to make a deal work (Dow and Wrigley), or just needed the money and his name when times were tough (GE and Goldman Sachs). Unlike those deals, where Buffett was sought out by the companies involves, this was an approach from Buffett himself to Burlington management, so its an aggressive move from that respect, not reactive.
It was financial commentators and others on Bloomberg and blog sites and analysts who were wondering if the terrible fall in US and global markets late last year and into early 2009 would damage Buffett’s golden run and successful investing. Berkshire Hathaway shares plunged with the market, and they have recovered with the rebound, but nor by quite as much.
Now they are saying “brilliant, coup”, etc, as only cheerleaders can do. But it does make him an industrial giant, adding to his existing interest in power generation, manufacturing, building materials, housing and real estate, besides his huge insurance businesses based on General Re and Geico. Plus his huge investment portfolio where Burlington first appeared about two years ago.
There’s another potential bit of synergy in buying a railway that supplies power stations. Electrification of long distance railways is rare in the US (outside the North-East) – if oil goes through the roof he has the option of electrifying the railway to run (indirectly) on coal. I assume he’d be in a position to negotiate a preferential electricity rate for his railway from power suppliers. This could give him a massive advantage over road transport in an expensive oil world.
From what I understand CCS technology is less efficient than conventional coal-fired power, which would mean that if the power stations went CCS *more* coal would be needed.
Lastly, if the oil price goes high enough, there’s the possibility of coal-oil conversion.
It’s a very, very smart move (I’m tempted to say genius), seeing opportunities where others haven’t, taking the long view and generally being typically Buffet.