Tuesday, November 3, 2009

Despite Buffett Bid, More Rail Deals Seem Unlikely (BRK.A; BNI; CNI; CSX; NSX: UNP)

Hey! What about Bill Gates' CNI?
From DealBook:

Warren E. Buffett’s $26 billion deal for Burlington Northern Santa Fe helped bolster railroad stocks on Tuesday, partly as investors consider the possibility of similar deals to come. But analysts seem to agree that the chances of another mega-railroad buyout remain pretty low.

Mr. Buffett’s investment company, Berkshire Hathaway, is offering a 31 percent premium for the 77.4 percent of Burlington it does not already own. Such a large premium equated to Mr. Buffett paying about 18 times Burlington’s average 2010 earnings. In comparison, rival railroads like Union Pacific and CSX trade at around 13 times their 2010 earnings.

The Buffett premium sent railroad stocks climbing on Tuesday. Union Pacific, in which Mr. Buffett holds a stake, was up about 7 percent in late trading. Kansas City Southern gained about 8 percent, while CSX was up nearly 7 percent, respectively. Norfolk Southern, another railroad stock owned by Mr. Buffett, was up about 5 percent.

Analysts expect that railroad stocks will continue to gain based on the valuation that Mr. Buffett put on Burlington, even though the chances of further rail deals are low.

“With Berkshire making this ‘huge bet’ on Burlington — the largest acquisition in its history — the read-through is that the outlook for sector fundamentals is positive and the rails are still a great investment,” analysts at UBS said in a note to investors on Tuesday. “We do not foresee any more M.&A. deals like this in the near future.”

Analysts at Citigroup concurred. “While today’s announcement may provide support to the group near term, much like Buffett’s initial investments in Burlington did in 2007, we don’t see it as indicative of a broader wave or rail buyouts or consolidation,” the Citigroup analysts said in their note to investors. “Why? Investors know that regulatory restrictions should preclude mergers between railroads for some time, while we are hard pressed to come up with a reasonable hypothetical list of potential outright buyers for any of the remaining” railroad companies....MORE
Also at DealBook, The Deal Professor on the merger.