Warren Buffet successfully made an offer for the 70% of BNI Berkshire does not own. He made the offer at a 30% premium to the market price. He made the offer 70/30% cash-BRK shares or 100% cash - depending on the seller's wishes. For the rough purposes of this article, We can therefore consider Berkshire's offer an all cash offer.
Modern US rail is an immensely profitable business for certain.
Berkshire is paying more for BNI than BNI was worth at the absolute insane peak of the Market.
Berkshire is paying close to double the low price of just a few months ago.
Gudovac wrote about CSX a few days before Berkshires announcement. Gudovac concluded CSX (and likely BNI) would return about 8.37% CAGR to Owners. It is reasonable to believe that all 4 railroads would produce similar returns for their Owners. A 30% premium suggests approximately a paltry 5-6% CAGR on Berkshire's investment.
Why would Berkshire pay what appears to be a hefty premium for BNI ?
Berkshire's famous Owners Manual illuminates Buffet's screening tools for acquisitions. It is useful to examine the salient passages again:
Gudovac can accept that Berkshire is respecting the principles outlined above.
Why would Berkshire accept 1/2 the return it gets from the Goldman Sachs preferred of a year ago ?
It isn't because Railroads are going to be a booming growth business. There are some good arguments that Rail will capture market share from Long Haul trucking. However, these market share gains are likely to be made slowly over many years - perhaps decades.
Why is he accepting a 5% CAGR ? Couldn't Warren Buffet negotiate a better deal for BNI ? Why is he making an all cash offer ?
Perhaps it is because Warren Buffet doesn't want cash.
Perhaps Warren Buffet believes holding cash, and especially dollars, is making a high risk bet with little upside and plenty downside.
Perhaps Warren Buffet has concluded that hard assets are going to become very valuable in relative to Cash Dollars. Railroads are the ur-hard asset enterprise.
Warren Buffet by buying BNI has simply switched his dollars holdings into hard assets in one fell swoop.
Brilliant.
Owners can reasonably conclude that Warren Buffet has determined Dollars are going to lose value 'significantly' and 'soon'.
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