Buffett Buying Burlington Rail in His Biggest Deal

NEW YORK (Reuters) - Warren Buffett's Berkshire Hathaway Inc will pay $26 billion to buy out Burlington Northern Santa Fe Corp in a bet the nation's largest rail company will benefit from a recovering U.S. economy.

The deal, announced on Tuesday, is the billionaire investor's biggest-ever acquisition and may prompt him to sell some of his other investments, which include a wide range of companies from Coca-Cola Co to General Electric Co, some Buffett watchers said.

By betting on BNSF, Buffett -- the world's second-richest person and a long-time model train buff -- renewed interest in a storied, but highly cyclical American industry that has tried to reinvent itself by emphasizing its ability to move goods cheaply and efficiently.

"It's an all-in wager on the economic future of the United States," Buffett, who has been building up his rail holdings for several years, said in a statement. "I love these bets."

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Buffett will pay a premium of 31.5 percent over BNSF's closing stock price on Monday, valuing the railroad at $34 billion, or 18 times estimated 2010 earnings. Most rail companies' P/E ratios are in the mid-teens.

BNSF shares jumped 27.51 percent and other U.S. and Canadian rail shares also rose, as analysts said the deal puts an oft-neglected industry in Wall Street's focus and could bring some fresh money into the sector. But they did not expect a wave of deals in the railroad sector, given regulatory concerns.

"Buffett has always stated that he likes the longer-term viability of the rails ... but people really weren't paying attention," said Longbow Research analyst Lee Klaskow. "This is shining a spotlight on this group, bringing more investors into the fold."

SHARE DEAL UNUSUAL FOR BUFFETT

Buffett, who has long preferred all-cash deals, is paying $100 per share in cash and stock for the 77.4 percent of BNSF shares that Berkshire does not already own.

Berkshire would also assume $10 billion of BNSF debt. It would pay about $16 billion in cash, of which $8 billion would be from its own funds and the rest from debt.