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No. of Recommendations: 34
I love the BNSF deal. Best thing ever.

Quite aside from any increase in the value of the firm and retained earnings, it returned an after tax dividend
yield to BRK averaging maybe 10% in the first 10 years of ownership, depending on how you estimate the cost of the acquisition.


After the purchase, former BNSF shareholders represented owned 5.765% of Berkshire shares.
So, did we get good value for that dilution?

Even if you assume (somewhat heroically) that Berkshire was worth 1.75 times known book on closing day when BNSF
was purchased rather than the market price at 1.403 P/B on closing day, the total purchase cost was $35.95bn of intrinsic value.
That includes $2.92bn of "invisible" cost for our estimate of the gap between market price and intrinsic value on closing day.
$8bn of that total cost was and remains financed at low interest rates.
For practical purposes that debt can be considered to be secured by the BNSF shares acquired, even though it's a general obligation.
In any case, Berkshire's head office gearing has been lower than usual in recent years. It's not like they stretched.
My main point: overall I think that block of financing is best viewed as part and parcel of the acquisition.
So, for ~$28bn out of pocket value paid we got all the ongoing returns from BNSF less the ongoing interest cost on that debt.

It's hard to estimate the value of the railway these days in a way we'd all agree on, but we can look at the cash return in hand.
Dividends averaged $3.43bn/year in the first 7.88 years of ownership, net after tax in Berkshire's hands.
Interest has been maybe $160m a year on the $8bn financed, for a net after tax yield of 11.72% on the ~$28bn notional acquisition cost.
Yes, debt has risen at BNSF HQ, but the value of the firm has risen even more, so that's a net hidden gain on top of the cash yield, not a drag.

Arguably the railroad has outperformed the average other asset at Berkshire.
By extension, the modest amount of stock used to purchase a fraction of it was well spent.
If the railway had been bigger it would have been sensible to issue even more stock to buy more of it. But it was only so big.

Jim
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