Berkshire Hathaway Deal

Some brief comments on the Berkshire Hathaway deal today-

  1. Buffett is buying the rest of Burlington Northern (ticker:BNI)  for $100 a share- approximately 60% in cash and 40% in stock. The stock component is subject to a collar where the value of a Berkshire Hathaway share received is fixed at $100 if the BRKA stock price at the closing is between $80,000 and $125,000. If BRKA closes outside this range, the number of shares of BRKA stock received will be fixed at either 0.001253489 per BNI share below the collar range, and 0.000802233 per BNI share for values above the collar range. A shareholder may receive class A shares or instead of fractional shares, the equivalent economic value of class B Berkshire shares.
  2. The BRKB shares will be splitting 50 to 1. Buffett is doing this in order to allow smaller BNI shareholders to opt for a share exchange rather than a cash payment. By splitting the Berkshire “B” shares 50-for-1, they can accommodate even small holdings of BNI shares that elect a tax-free stock exchange.
  3. The 50-to-1 stock split of the BRKB shares means there is a high likelihood that Berkshire Hathaway will be added to the S&P 500 index within the next year. You will likely see many large cap mutual  funds start to accumulate Berkshire stock over the next few months. Once it is actually added, there will be massive purchases by index funds.
  4. Buffett has sold out-of-the-money puts on Burlington Northern which has helped fund the acquisition.
  5. Buffett appears to be using my favorite strategy for the game of Monopoly- buy up all the railroads!
  6. By purchasing BNI, Buffett is diversifying out of insurance into railroads. I believe he sees inflation on the horizon. Burlington’s assets (rail cars, railroad tracks etc) are a good inflation hedge.
  7. Railroads have been upgrading to cleaner burning diesel engines, in some cases using grant money from the EPA. These engines reduce the amount of carbon dioxide emitted. Rail transportation is a “green technology” play since a diesel locomotive can  move one ton of freight 431 miles on a gallon of diesel fuel. Trucks typically get six to eight miles per gallon. This gives railroads a major selling point, and they may capture a lot of the truck traffic and re-direct it to rail.

Full Disclosure: I own BRKA.

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