$44B Transaction Gives Berkshire Hathaway Sole Ownership of BNSF

[beaulieu]

CMStPnP

beaulieu

Soo Line Corp.

Grand Trunk Corp.

 

Soo Line is Canadian Pacific now I thought

Grand Trunk is Candian National now I thought

 

The railroad subsidiaries of Soo Line Corp. and Grand Trunk Corp. have agreements with their parent Corporations (Canadian Pacific and Canadian National respectively) to conduct business under the parent Corporations name( a d/b/a or "Doing Business As" agreement), the subsidiaries and their subsidiaries retain their distinct names and are referred to as such for all regulatory and financial matters. A separate subsidiary is required for each Canadian company, and that subsidiary must have all the necessary assets on its books to function as a railroad ( locomotives, freight cars,employees,  rail and other ROW items, plus a Headquarters in the US) For example the Soo Line Corp. is subject to STB and IRS oversight, while the rest of Canadian Pacific is not. So if you ship a carload of steel from Edmonton to St. Paul with CP as the only carrier, to the shipper it looks like just one carrier, but internally CP will book an interchange between parent CP and subsidiary Soo Line RR,  just the same as if it went to BNSF instead.

 

Canadian Pacific directly owns Soo Line Corp, a Minnesota Corporation, and recognized by the STB as a Class I railroad.

In turn  Soo Line Corp owns the following;

Soo Line Railroad

Delaware and Hudson Railroad

Dakota, Minnesota & Eastern Railroad

49% interest in the Indiana Harbor Belt RR.

some percentage of the Belt Railway of Chicago

[Looshi]

beaulieu

Looshi

As I discussed earlier today on my blog I don't see this deal creating another round of mergers. The status quo is very stable and I don't see big changes happening until that balance of power is upset. Is Buffet buying BNSF enough to change this? I don't think so. As far as we know at this time there will be little change in the day to day operation of the railroad and current management isn't going anywhere.

Combine that with the fact that the current political climate is very hostile to mergers and I don't think you will be seeing two mega-railroads in America anytime soon.

 

Nice looking Blog. One correction the Kansas City Southern is one of the seven Class I railroads in the United States. The other six are

Burlington Northern Santa Fe

Union Pacific

Norfolk Southern

CSX

Soo Line Corp.

Grand Trunk Corp.

 

Thank you for the correction. Has KCS always been that big? I know the definition of Class 1 is somewhat arbitrary and has changed over time but I've only been following railroads seriously for the last few years (I'm 19).

[MJChittick]

beaulieu

One correction the Kansas City Southern is one of the seven Class I railroads in the United States. The other six are

Burlington Northern Santa Fe

Union Pacific

Norfolk Southern

CSX

Soo Line Corp.

Grand Trunk Corp.

Grand Trunk Corp is the US subsidiary of Canadian National

Soo Line Corp is the US subsidiary of Canadian Pacific

Kansas City Southern is the seventh US Class 1 railroad.

[blownout cylinder]

rstaller

I don't like the idea of Buffet owning BNSF entirely.  Look at the trouble CSX has had with their investor, Children's Fund or whatever it's called.  Diverse ownership keeps corporate raiders from raping companies and walking.  I would hope BNSF employees wise up quickly and start taking any legal steps needed to protect their interests in the company.  Also if Bill Gates, decides to buy, oh lest say for the sake of argument, NS, then decides to sell it to Buffet, no permission is needed from the goverment, as it is not a merger, but a privately company being sold by one individual to another. WISE UP PEOPLE.  R. Staller

Not so fast--

I think it is a little unfair to characterize sole ownership of a company as one of a 'T. Boone Pickens' sort. I've worked in companies that were sole ownership and did not find them to be ripping people off as much as ---say---some that we have read about in the not so recent past. Remember Enron? Adelphia? 3Com? etc---etc---all fine stockholder--diverse owned corporations.

Wherever humans are you will find a human who will be a Gordon Gecko sort. And from what I've seen of Berkshire Hathaway's operations they don't seem to interfere with much---

[MP173]

There are pros and cons for public and private ownership. 

If a railroad is public, the capital equity markets are available, in which stock can be issued to raise capital.  Also, majority owners have a much more liquid method of selling their holdings.  The cons include public reporting of accounting, the Sarbane Oxley rules (working for a company which is owned by a publicly traded company, I can verify Sarbane Oxley is a very difficult and expensive, but overall is not a bad thing).

By taking a railroad private, a company such as Berkshire Hathaway is basically saying I believe in BNSF and am going to hold this for a very long time.  This is much different than a private equity firm or investment firm.  Fortress purchased Rail America 2 years ago and loaded it with debt and then recently issued stock.  There were two purposes to the stock IPO.  One was to raise capital and the other to recoup their investment.  A certain percentage went to the company coffers, but quite a bit to Fortress.  Now, that is their right as they are the owner (along with the banks), but the long term goals of the railroad are often sacrificed.

There is a very interesting and timely book review in the WSJ today about the Private Equity industry.  Generally, the author (The Buyout of America, by Josh Kosman) seems that PE buyouts adds debt, leads to reduction in employees, often the movement of a company to lower cost regions, etc.  Obviously Berkshire Hathaway cannot move the railroad.

Further, Buffett and BH have an outstanding long term history of buying and managing companies.  There have been some bombs such as Salamon Bros, US Air, and the newspapers are currently not doing so well, but from all indications this has to be positive for BNSF employees and management.

Interestingly, I have a report from Bear Sterns from 3 years ago about the railroad industry, potential buyout and selling prices, and other info on the industry.   The report is over 300 pages and is interesting for a couple of reasons.  One...this report was issued near the top of the PE bubble and made it clear that it was possible to buyout a railroad.  Two...Bear Sterns is now gone, a victom of the debt bubble that it pushed so hard.  Three...BNSF, DME, and Rail America are all in the cycle.

One must remember that BH probably will not issue debt to finance BNSF.  They dont have to in order to use OPM (other people's money)...they use the float off of their enormous insurance holdings.  Buffett has often said that float is an amazing thing, it is like an interest free loan.

For those of you interested in finance and investing, reading the BH annual reports is much like RWM explaining the railroad industry.  Entertaining, well written, and very informative.

Perhaps RWM is Warren Buffett....

ed

[MP173]

BTW, anyone interested in the blowup of the current financial markets would find the book House of Cards by William Cohan to be a very informative source.

It explores the "tale of hubris and wretched excess on Wall Street."  Lessons should always be learned from failures.

ed

[Paul_D_North_Jr]

Today's Wall Street Journal has a shortish article on page C-3 that quotes Matt Rose - BNSF's CEO - as saying and a compnay SEC filing as stating that Berkshire Hathaway will sell off all of its NS and UP shares before completing the purchase of BNSF early next year.

- Paul North.

[nanaimo73]

Paul_D_North_Jr

Today's Wall Street Journal has a shortish article on page C-3 that quotes Matt Rose - BNSF's CEO - as saying and a compnay SEC filing as stating that Berkshire Hathaway will sell off all of its NS and UP shares before completing the purchase of BNSF early next year.

- Paul North.

Anyone happen to know the level of foriegn ownership allowed in the Class 1 railroads? Would it depend on the country involved? For instance, would a German company be allowed to own a larger share of Union Pacific than a Chinese company?

[jeaton]

nanaimo73

Paul_D_North_Jr

Today's Wall Street Journal has a shortish article on page C-3 that quotes Matt Rose - BNSF's CEO - as saying and a compnay SEC filing as stating that Berkshire Hathaway will sell off all of its NS and UP shares before completing the purchase of BNSF early next year.

- Paul North.

Anyone happen to know the level of foriegn ownership allowed in the Class 1 railroads? Would it depend on the country involved? For instance, would a German company be allowed to own a larger share of Union Pacific than a Chinese company?

Not sure about other countries, but the Class 1 US subsidiaries of the CN and CP are wholly owned by a bunch of foreigners.  LOL

 

[Dakguy201]

jeaton

Not sure about other countries, but the Class 1 US subsidiaries of the CN and CP are wholly owned by a bunch of foreigners.  LOL

And just to make the relationship with Canada more complicated, the CN and CP undoubtedly include on their stockholder lists many, if not a majority, of US based individuals, mutual funds and other investment vehicles.

Our economies are so integrated that one could spend a lifetime just attempting to understand all of the relationships.  I do wish they would do something about those pesky cold front exports, however.