Buffett Bets on Bright U.S. Economic Future With Burlington

Warren Buffett believes in the United States’ economic future, and yesterday (Tuesday) he put his money where his mouth is.

Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) acquired railroad Burlington Northern Santa Fe Corp. (NYSE: BNI) in a deal valued at $44 billion, the largest in Berkshire’s history.

Berkshire, which already owns 22.6% of the company, will pay $100 per share in cash and stock for the remainder of Burlington’s business. The offer values Burlington stock at a 31.5% premium to its Monday close. The deal, expected to close in the first quarter of next year, includes $10 billion in Burlington debt.

Buffet said the purchase was not just an affirmation of his confidence in the U.S. railroad industry, but a vote of confidence for the U.S. economy as a whole.

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“It’s an all-in wager on the economic future of the United States,” Buffet said. “I love these bets.”

Investors on both sides of the table will benefit from the deal: Burlington shareholders can take the premium on Monday’s closing price, or they can opt for Berkshire stock, which represents 40% of the deal. Meanwhile, shareholders of Berkshire’s class B stock get extra shares thanks to a 50-to-1 split the company announced in conjunction with the Burlington deal.

A shares of Berkshire, which represent the majority of shares in the deal, rose $1,700, or 1.72% to closed yesterday at $100,405.00 per share in trading today. Pre-split shares of class B stock rose $60.35, or 1.85%, to close at $3,325.35.

“The small shareholder can have exactly the same availability that would have only been available to a big shareholder,” Buffett told CNBC’s “Squawk Box” this morning in an interview.

Berkshire’s deal highlights Buffett’s affinity for profitable companies that don’t rely on high technology: Burlington is the largest transporter of coal, hauling enough to power 10% of the homes in the United States.

The deal also represents a complete reversal of the stance Berkshire took on railroads just a few years ago.

“Warren and I have hated railroads our entire life,” Charles T. Munger, the vice chairman of Berkshire Hathaway, said in 2007, the year his company first started investing in Burlington. “They’re capital-intensive, heavily unionized, with some make-work rules, heavily regulated, and long competed with a comparative disadvantage versus the trucking industry, which has a very efficient method of propulsion (diesel engines) and uses free public roads. Railroads have long been a terrible business and have been lousy for investors.”

But rising prices for diesel fuel, growing highway congestion and growing environmental concerns helped change Berkshire’s position.

“As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors, truckers, roughly by a factor of four,” Buffett told shareholders in 2007 at his company’s annual meeting. “There could be a lot more business there than there was in the past.”

Unlike trucks, trains don’t get stuck in traffic and when trains carry 100 tons over 1,000 miles, they produce 45% less pollution than a long-haul truck does, according to Burlington.