(The following story by Joe Ruff appeared on the Omaha World-Herald website on November 8, 2009.)
OMAHA, Neb. Burlington Northern Santa Fe Corp. need no longer worry about hedge funds or other activist investors that attempt hostile takeovers, said Matthew K. Rose, CEO of the rail company.
Thats what happened two years ago to CSX Corp., which serves the eastern United States, he said. You get those kind of things when you are a publicly traded company.
If BNSF shareholders approve the purchase by Omaha-based Berkshire Hathaway Inc., which they are expected to do, the company will reside safely under the wing of Warren Buffett.
If there is one thing this does, it shields us from that kind of short-term distraction, Rose said.
When you think about being lodged in a company such as Berkshire Hathaway, one of the most admired companies in the world, led by the business icon of the day, Warren Buffett, it is a great opportunity.
Rose, who also is BNSF chairman and president, talked at length Friday about Buffetts surprising announcement last week that he would purchase BNSF in a $36 billion deal, including assumption of $10 billion in debt.
The purchase has no downside for shareholders, customers or employees, said Rose. Shareholders get a 30 percent premium on the recent share price, customers get a stable partner, and management and employees get an owner who values long-term growth, he said.
Rose said he isnt worried that Buffett or Berkshire will interfere in Roses management of the corporations chief subsidiary, BNSF Railway Co. of Fort Worth, Texas.
Warren told me he doesnt know how and he doesnt want to.
Likewise, no big changes are expected in the railroads network, including in Nebraska, where BNSF has more than 4,000 employees and runs a large operation in Alliance, Rose said.
Rose, 50, said he expects to come to Omaha annually to talk with Buffett about BNSF. And Rose plans to attend Berkshire Hathaways annual meetings every May, which typically attract more than 30,000 people.
Our annual meetings at the railroad last about 34 minutes, Rose said. I am not sure what to make of an annual meeting that lasts two days.
In a press release announcing the purchase, Buffett said the investment was a huge bet on the company and on CEO Matt Rose and his team.
Rose, a native of Salina, Kan., said he has known Buffett for about 10 years. He would see us when he was down here. He has gotten to know our business.
An investment analyst who follows the railroad industry said he knows little of Rose beyond his good track record leading the company. In Forbes magazines April 2009 ranking of executive compensation, Rose was No. 1 in the transportation sector, with total compensation over five years of about $140 million.
Jim Cardle, chairman of the Austin (Texas) Economic Club, said Rose is honest, competent, levelheaded and knows the transportation industry.
Matthew Rose is an absolute star and generally regarded in Texas as one of the best business managers in the country, Cardle said.
A member of the board of trustees at Texas Christian University in Fort Worth, Rose, who graduated from the University of Missouri, also is chairman of the TCU capital fundraising campaign. BNSF has sponsored a leadership program at the school, said Homer Erekson, dean of Texas Christians Neeley School of Business.
He has high standards, he understands the rail industry and is recognized in national business circles, Erekson said. And he is an ethical person. Matt really lives that.
Burlington wasnt looking for a buyer when Buffett came calling, Rose said. Although management knew we had the thousand-pound gorilla in the room at 22.6 percent, Rose said, referring to the percentage of the company Berkshire previously owned.
It was my belief he was going to continue as a shareholder at 22.6 percent. This was a surprise. I dont think totally unexpected, but a surprise.
Buffett began investing in BNSF in 2006 and gradually built up his holdings.
He made his offer to Rose about two weeks ago, and Rose took it to his board of directors.
It would have been irresponsible for me to negotiate, Rose said. I had no authority, nor did I know whether the company should be a merger candidate.
Anytime a significant offer is made to the company, in this case the CEO, the board then has the responsibility to look at the offer. In this case, our board hired advisers, bankers, and looking at the long- and short-term opportunities for the company, this meant a compelling value to our shareholders.
The deal requires shareholder and regulatory approval but is expected to close early next year. BNSFs board will be dissolved after the acquisition.
Analysts and industry experts have said Buffetts purchase offer reflects well on the value of railroads, including public companies and BNSFs chief rival, Omaha-based Union Pacific.
Rose said he agreed. Private ownership isnt a big deal, he said.
Its an awareness of the value of the railroads. I dont think its a shake-up of the rail industry, Rose said.
Railroads were formed under private ownership, and Southern Pacific was privately owned until Union Pacific bought it in 1996, Rose said. BNSF has been publicly owned for more than a century.
The railroad industry has seen private and public companies.
(The following story by Brendan Case and Eric Torbenson appeared on The Dallas Morning News website on November 8, 2009.)
DALLAS, Texas In the shipping battle of trucks vs. trains, Warren Buffett's wager is on rail.
The next economic uptick just getting started in some areas will call Buffett's bet on whether railroads can deliver big earnings.
His $44 billion gamble on Burlington Northern Santa Fe Corp. suggests he thinks three decades of deregulation, consolidation and infrastructure investment have built the engine for the next chapter in the so-called railroad renaissance.
The recession put an emergency brake on demand over the last two years. But with freight volumes set to recover if the economy gains steam, the nation still needs coal and an efficient way to move everything from cars to clothes to corn.
And energy prices are expected to rise, a trend that would favor railroads because they're more fuel-efficient than trucks.
"I think the railroads have market share opportunities," said Anthony Hatch, a railroad analyst in New York. "We expect fuel prices to go higher, which makes them cheaper. And in terms of carbon footprint, they use a lot less fuel, so they have a lot less emissions and a lot less cost."
To be sure, it's easy to exaggerate the rivalry between trucks and trains. The two sides fight over some shipments, but they work together to handle others.
Trucks boast speed and flexibility, and they have a strong advantage over distances of about 500 miles or less. Trains are competitive over long hauls, and they're also a more economical choice for bulk goods such as farm crops and coal.
So-called intermodal traffic in which a train handles long hauls while trucks handle pickup and delivery has grown smartly. Three of BNSF's top 10 customers are trucking companies, says Matthew Rose, the railroad's chairman and chief executive.
"We love the compelling vision of being able to work with trucking companies to take trucks off the highway, improve our fuel efficiency as a society, take carbon out of the air, take trucks off of I-35," Rose said. "That will be the same vision for the next 10 years."
But railroads need to improve their reliability if they hope to gain market share, says Bruce Allen, director of the Wharton transportation program at the University of Pennsylvania. During the last boom, railroads turned in a strong financial performance but sometimes struggled to avoid service delays and gridlock.
In 2007, railroads handled about 15 percent of freight tonnage, compared with nearly 70 percent for trucks, Allen said. Intermodal truck-rail traffic accounted for about 1.6 percent.
"At a time period when fuel prices are likely to go up, the advantage of railroads is likely to get bigger and bigger," Allen said. "But I've learned over the years, you never count out the resiliency of these truckers. It's amazing what they're able to do."
BNSF grows
Since 2000, the U.S. railroad industry has invested billions of dollars expanding track, buying locomotives and building freight yards. Even amid the industry's transformation, BNSF stood out.
After Rose took over in late 2000, revenue nearly doubled between 2001 and 2008, beating the 50 percent increase registered by rival Union Pacific Corp.
With sales of $18 billion last year, BNSF nosed ahead of Union Pacific as the nation's largest railroad.
Freight haulers of all stripes have seen business dry up during the U.S. recession. As the economy recovers, however, analysts and investors see railroads as valuable prizes.
"Stop and think: Do you think we'll ever have any new railroads?" asks Don Hodges, co-manager of the Dallas-based Hodges Fund.
Hodges began buying BNSF shares in 2004, when they were hovering around $35 each. He sold last week, after the stock jumped to a few dollars shy of $100 when Buffett announced his deal.
He still sees a bright financial future for railroads.
"The supply is constrained by lack of new competition," he said. "It's the most efficient method of shipping by a factor of about three, when you look at consumption of fuel. Highways are overloaded, and trucks spew forth a lot of carbon into the air."
It's far from clear how quickly the nascent economic recovery will boost freight volumes. But Rose says the railroads will be ready as demand revives, thanks to the industry's increased capacity.
"I think we've proven that it's actually easier to expand the railroads than it is to expand the public highways, because we own the majority of the land," he said.
"And we don't have the same regulatory restrictions to lay down track as you have to lay down new highway."
Better competition
But can railroads use their advantages to snatch more business?
"There's no question that rail has been taking an aggressive posture in public as holding itself out to be more fuel-efficient and more eco-friendly," said Bruce Carlton, president of the National Industrial Transportation League, which represents shippers.
That's a handy argument at a time when Congress is considering legislation that could toughen federal regulation of the industry. But there are signs that railroads are competing more effectively with trucks.
Some shippers are picking rail for trips as short as 500 miles, Carlton said.
"Railroads are making some incursions there," he said.
Not so fast, said Clayton Boyce, a spokesman for the American Trucking Associations. Plenty of communities have no rail freight service. Trucks can go anywhere roads go and they typically offer speedier, more reliable service than trains.
"You still cannot get beyond all the limitations of rail," Boyce said. "Very, very little freight goes directly from a source to a destination without going on a truck."
Like Rose, however, Boyce notes that the two industries often work hand in hand. BNSF's growth depends on doing more of that.
"We work with them very closely," Rose said, referring to trucking companies. "They still participate by providing the pickup and delivery, and we do the middle to long-haul stuff, which is exactly what public policy should want. Get the trucks off the highway, get them to the railroad."
