BNSF Railway
Company Overview
BNSF Railway is the largest freight railroad in North America by revenue, operating 32,500 route miles across 28 states. Berkshire Hathaway acquired the outstanding shares of BNSF in February 2010 for approximately $34 billion in cash and stock — at the time Berkshire's largest acquisition ever. Buffett called it an 'all-in wager on the economic future of the United States,' reflecting his conviction that American freight demand would grow substantially over the coming decades.
Investment Story
Pre-investment (2007–2008): Berkshire began accumulating BNSF shares in the open market starting around 2007, building a roughly 22% stake at an average cost in the $70s per share. This was a public market position, not a private negotiation — Berkshire was simply buying shares of a company it admired.
2009: Full acquisition announced. In November 2009, Berkshire offered to acquire the remaining 77.4% of BNSF shares it didn't own at $100 per share — a 31% premium to the prior day's closing price. The $34 billion total transaction price was approximately 15x annual EBITDA. Buffett financed the deal with a combination of cash and Berkshire stock — one of the rare times he has used stock as acquisition currency, justified because he believed Berkshire stock was at or near fair value.
2010–present: Berkshire's largest operating subsidiary. BNSF became Berkshire's single largest source of operating earnings, generating $5.0 billion in pre-tax earnings by 2022. Its volume reflects U.S. economic activity: intermodal containers from West Coast ports, coal from Wyoming's Powder River Basin, agricultural commodities from Midwest farms, and industrial goods across 28 states.
Capital investment discipline. Buffett has consistently praised BNSF management for maintaining the physical plant at the highest standards while investing in new capacity where returns justify it. BNSF spends $3-4 billion annually on maintenance capex alone — one of the largest industrial capital programs in America — while still generating enormous free cash flow for Berkshire.
Buffett's Own Words
Berkshire’s recent acquisition of Burlington Northern Santa Fe (BNSF) has added at least 65,000 shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner, and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual report, consequently, we restate the economic principles that guide us. This year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholders – to read them. B
Anheuser-Busch Companies, Inc............. 4.8 1,718 1,861 60,828,818 Burlington Northern Santa Fe.................. 17.5 4,731 5,063 200,000,000 The Coca-Cola Company ........................ 8.6 1,299 12,274 17,508,700 Conoco Phillips ....................................... 1.1 1,039 1,546 64,271,948 Johnson & Johnson.................................. 2.2 3,943 4,287 124,393,800 Kraft Foods Inc........................................ 8.1 4,152 4,059 48,000,000 Moody’s Corporation .............................. 19
In addition, we have holdings in Moody’s and Burlington Northern Santa Fe that we now carry at “equity value” – our cost plus retained earnings since our purchase, minus the tax that would be paid if those earnings were paid to us as dividends. This accounting treatment is usually required when ownership of an investee company reaches 20%. We purchased 15% of Moody’s some years ago and have not since bought a share. Moody’s, though, has repurchased its own shares and, by late 2008, those repurchases reduced its out
Berkshire’s recent acquisition of Burlington Northern Santa Fe (BNSF) has added at least 65,000 shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner, and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual report, consequently, we restate the economic principles that guide us. This year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholders – to read them. B
I think about how we can build on this base. Both of us are enthusiastic about BNSF’s future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller
Investment Lessons
Infrastructure monopolies deserve premium prices. No competitor will build a second transcontinental railroad — the capital required ($100+ billion), the land acquisition challenges, and the regulatory barriers make new entry essentially impossible. BNSF's competitive position improves every year as road congestion makes rail more attractive and as fuel efficiency advantages over trucking compound. Paying apparent premium prices for structurally irreplaceable assets is often the most rational long-term investment.
An unleveraged 'all-in wager' on America. BNSF's revenues track U.S. and global trade volumes. Buffett's conviction that American economic activity will be substantially greater in 20-30 years than today — without any specific economic prediction about the intervening path — justified a permanent, large capital commitment to the country's transportation infrastructure.
Patient public market accumulation enables private negotiations. Berkshire's 22% public market position gave it both insight into BNSF's operations and the standing to negotiate a private acquisition. The investment process — years of public market purchase followed by negotiated full acquisition — is a pattern Berkshire has used in multiple situations.