Tuesday, November 10, 2009

Buyout Analysis of Berkshire Hathaway’s Offer to Purchase Burlington Northern

Berkshire Hathaway’s offer to purchase the 77.4% it does not already own of Burlington Northern Santa Fe Corp. (BNSF, NYSE: BNI) will cost Berkshire $26 billion, or $100 a share in cash and stock. Including Berkshire's previous investment in the railroad, the offer values 100% ownership of BNSF at approximately $44 billion.

I did a forecast of BNSF's future operations assuming: a 10% growth in revenues per year for the four years following a forecasted, depressed fiscal 2009; and modestly improved operating margins when compared with fiscal 2009 through the third quarter. Given that forecast, I then calculated a financial buyer’s estimated pretax ROR resulting from buying 100% of BNSF (in a hypothetical asset sale) for a net price to the sellers of $44 billion, the implied value of 100% ownership of BNSF.

The results of the buyout analysis show a pre-tax, junk bond kind-of-return (approximately 12%) on the financial buyer’s equity investment. The return would be lower if the buyer were required to grant warrants to subordinated debt holders. Click here to access the analysis and various reports. The “Overview” narrative describes the valuation method and results.

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