The sales came months after U.S. Sen. John Rockefeller (D-W.Va.), who serves as chair to the Senate Committee on Commerce, Science and Transportation, sent a letter to the STB expressing his concerns about Berkshire Hathaway’s acquisition of Burlington Northern Santa Fe Railway Co. in 2010.
Rockefeller argued that Berkshire failed to acknowledge the two short lines as the company continued its $44 billion BNSF deal.
“These multi-rail holdings raise questions about the federal approval process of the acquisition in 2010,” Rockefeller said, requesting a federal review of the purchase.
The two short-line railroads in mention were White City Terminal Union Railway LLC (WCTU) and RVTR Rail Holdings LLC.
Burlington Executive Vice President of Law and Secretary, Roger Nober explained to the STB that Berkshire overlooked the two railroads because of Berkshire’s small positions in the companies.
Burlington officials continued:
“The situation is unique because, despite a comprehensive review of the assets of both companies, we only recently became aware that two very small rail lines had been classified as rail carriers, and therefore were subject to STB review. The two rail carriers combined operate only 18 miles of track and are innocuous holdings of two of the nearly 2,000 subsidiaries within Berkshire's operating business groups. Nevertheless, this oversight was technically out of compliance with Surface Transportation Board regulations, which give that body the authority to review the merger of companies that own rail carriers…
“Both Berkshire and BNSF went to great lengths before the merger to meet the requirements of all regulatory bodies, including the Department of Justice and the Federal Trade Commission. These steps included Berkshire divesting approximately $500 million in interests in other railroads.”
Though Berkshire forgot about its WCTU and RVTR short-lines during its acquisition of Burlington, it sold all of its 9.6 million shares of Union Pacific Corp. (UNP) and 1.9 million shares of Norfolk Southern Corp. (NSC) to meet federal regulations at the time.
In Berkshire’s 2010 Annual Letter, Buffett wrote that Berkshire’s Burlington acquisition will “increase Berkshire’s ‘normal’ earning power by nearly 40% pre-tax and by well over 30% after-tax.”
Buffett also expressed how he and his partner, Charlie Munger, were pleased about the transaction, as it was also a play on energy.
“Both of us are enthusiastic about BNSF’s future because railroads have major cost and environmental advantages over trucking, the 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 need for imported oil. When traffic travels by rail, society benefits.”
Berkshire was long Burlington before completely acquiring the company in 2010.
According to the American Short Line and Regional Railroad Association, short-line railroads are critical for preserving the connectivity to factories, grain elevators, power plants, refineries, mines and transload facilities that employ over 1 million Americans. These freight rail infrastructures are only maintained by private sector investments, as opposed to highway infrastructures, which are maintained by federal and state governments.
In a Burlington earnings letter released in the beginning of the year, Buffett wrote:
“Though many people decry our country’s inadequate infrastructure spending, that criticism cannot be levied against the railroad industry. It is pouring money — funds from the private sector — into the investment projects needed to provide better and more extensive service in the future. If railroads were not making these huge expenditures, our country’s publicly financed highway system would face even greater congestion and maintenance problems than exist today.”
Below is a market value comparison of railroad stocks: Union Pacific Corp. (UNP), Trinity Industries Inc. (TRN), CSX Corp. (CSX), MTR Corp. Ltd. (MTRJY), Canadian Pacific Railway Ltd. (CP) and Norfolk Southern Corp. (NSC).
UNP data by GuruFocus.com
To view fundamental comparisons between these stocks, visit GuruFocus Comparison.
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