Berkshire Hathaway buys Burlington Northern Santa Fe (a U.S. railroad) for $44B
dealbook.blogs.nytimes.com
dealbook.blogs.nytimes.com
The hidden gem in this deal is the investment BNSF made in laying 24cnt fiber next to their track in continuous 4" pvc. I've always felt the decision to do that was a reflection on just how well-run the BN was as a company.
Large-scale packets on the rails, small-scale packets in the pipe.
Berkshire Hathaway doesn't just invest in well-run companies. It invests heavily in the management of well-run companies.
Railroads can haul a ton of goods about 400 miles with one gallon of diesel. When the dollar devalues and gas goes to $5-$10+ per gallon, we will be reminded once again why he is the Oracle of Omaha.
Buffett has talked about coming inflation in his last two or three annual letters to shareholders. When we start having 10% annual inflation, the p/e on this deal will get better and better.
"The Green Back Effect" by Warren Buffett, NYT, 8/18/09 - http://www.google.com/search?hl=en&rlz=1C1GGLS_enUS346US.... (sorry for the indirect Google link, NYT redirects direct links to a tease subscriber only page)
Question: What is your latest outlook on the dollar given what's been thrown up in the air in the last 6 months?
Buffett: It's pretty unpredictable. I guarantee you the dollar will buy less 10-20 years from now. But we are doing things that will hurt the purchasing power of the dollar. On the other hand the same thing is happening in different countries around the world. The British will run a deficit of 12 and a fraction percent of GDP. Even the Germans will run a deficit of 6 and a fraction GDP. You've got governments around the world all electing to run very material deficits. Electiing to do that to offset the contraction demand. How that plays out in relative exchange rates - I can't tell you. In terms of currency's purchasing power in the future - it's going to cause units of currency to buy a lot less.That isn't gonna happen in the next year or two. Doesn't mean markets won't start anticipating it at some point. We are doing things that we havne't seen in the past. And policy makers do not know the outcome and I don't know the outcome. You do know it will have consequences and you can bet on inflation.
Munger: I remember the 2 cent first-class stamp and the 5 cent hamburger. In my life I think I've had the most privileged era to live. The trick is to avoid runaway inflation.
So "I guarantee you the dollar will buy less 10-20 years from now" is a pretty safe bet, regardless of the general political and economic situation.
he engages in a lot of macro trades if you look back.
here are some examples: berkshire's silver trade executed by Commodity trader Andrew Hall of Phibro, going long the brazilian Real, investing in Petro China, his past investments in more than one railroad... these are all investments that correlate with a kind of macro theme. they might not be the only factor, but definitely A factor in his investment.
If he thinks that's going to happen, he should buy OIL ETFs, not railroads...
http://www.wired.com/wired/archive/6.05/qwest.html
Regarding the origin of the Qwest network: "Philip Anschutz, who owns more than 86 percent of Qwest - 55 percent of a combined Qwest-LCI - previously owned the Southern Pacific Railroad. When he sold the railroad to Union Pacific in 1996, he negotiated to buy the rights of way alongside the tracks of both railroads. Combined, they represent the cable route of a significant portion of the network. The rest of the cable is run along lines for which Qwest leases the right of way for up to 50 years, or along interstate highways, where it leases rights of way from transportation authorities for 20 or 25 years. Eighty-five percent of the Qwest network is strung along railroads."
In 1993, Berkshire paid $433 million for the Maine-based company. Rather than use cash, Buffett used Berkshire Class A stock to fund the purchase. That Berkshire stock is worth eight times more now, giving the Omaha, Nebraska-based insurance and investment company a $216 billion market value.
Dexter didn’t make it that long. It ended shoe production in the United States and Puerto Rico in 2001, and Berkshire folded what was left into its H.H. Brown Shoe Group unit.
“What I had assessed as durable competitive advantage vanished within a few years,” Buffett wrote on Friday. “By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6 percent of a wonderful business — one now valued at $220 billion — to buy a worthless business.”
“To date, Dexter is the worst deal that I’ve made,” Buffett went on. “But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.’”
Hell, it takes us longer to pick a font.
"It’s an all-in wager on the economic future of the United States," he said in a written statement. "I love these bets."
I wonder if it's also a long-term bet about the future cost effectiveness of rail vs. long-haul trucking for shipping goods to U.S. consumers.
http://www.factcheck.org/askfactcheck/can_a_freight_train_re...
// I'm not entirely sure that what I said is 100% truth, so take it with a grain of salt.
Hard tracks and wheels = less rolling friction?
Less air resistance since one leading car breaks the air for 100+ other cars?
Engine can run at a constant speed
Less changes in speed
Less starts and stops
Slower acceleration
The diesel that diesel engines burn is converted to electricity to power the traction motors, however.
Are you sure. I live in a third world country and most freight tracks are electrified.
For commuter trains, though, I am not sure why we use diesel. Lower upfront cost is my guess, which is kind of a shame. (The US has big problems with buying proper infrastructure. Much better to spend $100 million over 10 years and provide mediocre service than to spend $50 million in one year and provide excellent service for 10 years. Funding anything other than roads is politically unpopular; trains are "noisy" and we don't want more of them. Yeah... some day I will move to Europe or Japan...)
Nuclear, Hydro, Solar, Wind, Gas, Coal, and more
If using electricity, it is FREE to change fuel source. How much to convert all trains to nuclear/solar/electricity/... if all oil imports are blocked?
On a side note, I doubt that the amount of money it takes to convert a fleet of locomotives to electricity is even in the same ballpark as the cost to build a nuclear power plant. This also doesn't take into account any loss of power due to transmission distance, heat generated in the lines due to resistance, etc.
But it's not much -- 4 short lines with a total of 159 miles. All are closed loop lines linking coal loadouts and power plants.
FWIW, the November 2009 issue of Trains magazine has an article on US rail electrification.
Also, even diesel-electric trains are much more efficient than trucks.
The real point is that cost of fuel is a lower percentage of total costs for railroads (a casual search hit on a 1997 guidebook said 7.1% vs. 13.5% for trucking).
Here is the TSI-Freight and -Passenger: http://www.bts.gov/xml/tsi/src/index.xml
Watching the flow of raw materials and manufactures around the country is probably a better indicator of economic health than looking at the speculators pump up the Dow.
1. The capital expenditures of railroad companies are changing. Most of them have pretty much laid track everywhere needed. If expansion isn't necessary, CapEx will go to maintenance for the most part, this means a ton in "owners earnings" to go up to BRK-Parent
2. Railroads > Trucking when oil shoots up. Could be his view that this is likely.
For bonus, I know there is a lot of talk about BNI having a competitive advantage at getting access to shipping Chinese goods because of their west-coast track network, apparently they are better developed than others for this.
While this is true, rail networks are phenominally expensive to maintain.
Just look how it went down the gutter in the UK.
BNSF, OTOH, is profitable. I assume they even make money from their passenger service. (A commuter line in Chicago with 100+ trains per day.)
At the time, however, this was deemed to be better than allowing Joe TOC a monopoly on route A and Jane TOC a monopoly on route B.
In practice these are State companies still to all intents and purposes. The staff are all members of featherbedded unions and the government will be crucified by the voters if the TOCs screw up too badly, and everyone knows it.
I took the Amtrak train from Vancouver BC to Seattle WA last night - it was very nice. Price was reasonable (about 1/3 the cost of flying), seats huge, I got cell reception the whole way, power plug in the seats, and even a lounge car with snacks and drinks. There's really no better way to travel.
I would assume that the fuel costs of diesel locomotives are just as tied to oil prices than fuel costs of trucks. The operating costs of electric locomotives would get equally more expensive as well as electricity prices are not independent of oil prices (and electricity is always more expensive than oil).
The cost of trucking is dominated by the fuel-cost-per-ton-mile.
Whereas the cost of moving 1 ton of goods over rail is dominated by the cost of labor, the cost of moving 1 ton of goods via truck is dominated by the cost of fuel.
In point of fact, rail freight gets ~436 ton miles per gallon.
The only mode of transport that gets more ton-miles-per-gallon is water transport (DSO, dry bulk shipping, oil and gas tankers, panamax, river barges, etc...)
The edge case is liquid and gaseous hydrocarbons, which can be transported via pipeline. It's no surprise that Buffet has been buying up oil and gas pipelines over the past several years.
The only catch here is that waterway transport inside the United States has sub-optimal efficiency due to the Jones Act.
(Electric engines are out of the question for BNSF. Insanely high cost to electrify the network.)
Oil isn't used to generate electricity. At least not much. Look for coal, nuclear power, some natural gas.
In general electricity is much cheaper than oil based forms of energy. The reason why cars run on gasoline and Diesel is, that those have a much higher energy density than current batteries.
In 2009, the industrial price of electricity in California is around $0.10 / kWh. That's $0.028 / MJ. The current price of diesel oil is $2.801 / gallon, which is $0.616 / litre which is $0.016 /MJ (assuming 38.6 MJ/l as the heat of combustion of diesel oil).
So diesel oil is $0.016 / MJ while electricity is $0.028. As you can see, electricity is a _lot_ more expensive in ideal circumstances (all the energy is converted to useful work). Now obviously, not all of the heat in the combustion engine can be converted to mechanical energy so there's quite a loss there while electrical engines have very good energy efficieny ratios, but still, oil is a lot cheaper than electricity, and that is the main reason it is used as the primary energy source.
EDIT: I have made a huge (100x) mistake, thanks for eru for spotting it, it's corrected now. Still, my point stands.
In principal electricity should be at least as cheap as Diesel in terms of usable energy --- because if it was more expensive you could use Diesel to generate electricity (arbitrage opportunity).
Also the efficency of moving Diesel engines is not that good. Less than 30% or so. And they can't get much better without raising their working temperature, because the theoretic maximum (Carnot Engine) isn't that much higher. Moving engines have to be quiet compact --- on trains less so than in cars. The big stationary engines in the power plants do not have to conform to this limitation. (But there is some loss in transmiting the electrity through the power lines, too.)
I'll come back with some numbers soon.
Edit: I don't know why someone downvoted you. If your numbers are wrong, they should they so. If not, there's no reason to downvote.
"Even in sparsely populated large countries (Finland, Sweden) electrification has proven to be more economical than diesels."
(from http://en.wikipedia.org/wiki/Dieselization)
10 $ per kW/h sounds very high. Are you sure it's not 0.10 $ per kW/h?
When you buy metered electricity, you're paying for the end product. Internal combustion engines are roughly 20% efficient on average, going from chemical energy to kinetic. Electric motors are 90%+ from electricity to kinetic.
"Electric locomotives benefit from the high efficiency of electric motors, often above 90%. Additional efficiency can be gained from regenerative braking, which allows kinetic energy to be recovered during braking to put some power back on the line."
(From http://en.wikipedia.org/wiki/Internal_combustion_engine#Ener... and http://en.wikipedia.org/wiki/Electric_locomotive )
Wow Buffett splitting stock?!
So, some shareholders of Burlington will opt for shares instead of cash, and since you can’t own a fraction of a share, they have to split the stock to accommodate them.
Rail will be the de facto standard for mass transit for years to come. Why? Because it goes really, really fast, we have had literally hundreds of years of experience running trains of all sorts, and experience, know-how, and resources are available cheaply.
Honestly, I don't even think mag-lev will take over as the primary form of rail transport. It's still too expensive, and the gains not sufficient to justify the additional cost. We have high speed trains running impossibly fast on existing rail infrastructure - unless you can double that speed and break the sound barrier or something, there's no incentive to spend ludicrous cash on that sort of system. Even Shanghai, a city that seemingly has unlimited funds for infrastructure, has shied away from mag-lev after building the airport line.
(A renewed interest in public transport would be great as well)
BNSF has historically been the freight railroad most friendly to passenger rail. Unlike Union Pacific and CSX, they aren't antagonistic to Amtrak, and make an effort to give the passenger trains proper right-of-way.
An interesting note about the Metra service in Chicago is that it is operated by the BNSF under contract with the State. So the Metra conductors on the BNSF line are actually BNSF employees. It is one of the busiest and most productive lines Metra operates. It's also one of the most professional.
For efficient transportation, we want freight rail.
However, while the transformation away from import driven consumerism, to manufacturing led exports may sound like things are great, they are in fact getting slightly worse. Because it is driven by a reduction in American global purchasing power, this makes imports, oil among them, more expensive and domestic products more price competitive.
Seriously. I was going to make the same joke, but I was also going to follow it up with something more pertinent, like the fact that rails have the best cost-per-ton-mile or that railroads are both a monopoly and in limited supply (you can't just make more of them)
So -- love the joke. But everybody can't just shoot out one-liners like that, myself included. Next time add something of value to the reader besides a joke. We don't want this place turning into reddit.
I had an office two blocks away from the BNSF line in Chicago when they were laying the fiber from downtown to the central office in Hinsdale. I went out and talked to the guys boring underground (TX fiber-slingers wearing metal-tipped boots and hats -- I'm sure people here have met them).
Berkshire made a good purchase.
[next time] Could you just combine the two please so that I can enjoy voting up both the great one-liner and the pithy insight. I love humor, and I have a soft spot for great one-liners. My point is that others are the same way, and sometimes the jokes get more karma than the meaty content. That's not good for the board over the long term.
Whenever I find myself wanting to throw out a one-liner, I make myself stop and find something useful for others (or usually I don't post at all)
Lame attempt at this: http://news.ycombinator.com/item?id=919298
Apologies for the meta-discussion. This is yet another of my bad habits...
Think it helped?
Looking at the topic currently, out of 10 root replies, 2 are jokes, 1 is a basically a one-liner, 1 is trash, 5 are on-topic, and 1 is a complaint that this isn't HN.
(sigh)
Yep, it's kind of a bummer. Be interesting to see how it unfolds over the next hour or so (and we are polluting this unfolding with our meta-discussion) -- maybe it will even out. (Aha! http://news.ycombinator.com/item?id=919318)
http://www.reuters.com/article/smallBusinessNews/idUSN161636...
Does he know something we don't?
http://www.treehugger.com/files/2009/11/warren-buffet-buys-b...
But wait, they also assumed 10 billion in debt. So they just "spent" 34 billion buying sock + 10 billion debts to get the company.
PS: I don't know when BH got their initial stake, but they could have paid something like (34 / .774) = ~43.9 billion to get the company. Assuming the company was profitable and paying down the debt you can somewhat ignore it.
There may be some of interest to you. If not, well, someone else will probably figure out what they can do ...
actually, gigadollars...
Personally I find the movements of someone who's been so successful in business for so long interesting.