Warren Buffett’s buyout of BNSF Railway may be running smoothly toward completion early next year, but it is sending ripples down the tracks to rail lines and shippers. The deal has the potential to affect rail industry rates, regulation and competition as Berkshire Hathaway takes private a public company that had $18 billion in operating revenue last year.
Buffett unveiled plans Nov. 3 to pay more than $26 billion for the 77 percent of BNSF it does not own, and federal regulators are sorting through the implications of the largest railroad purchase in U.S. history.
The Surface Transportation Board, which usually rules on rail mergers and examines deals as part of its oversight of rail rates and service, signaled it may have no role in reviewing the mega-deal.
Even so, the agency conceded with Berkshire absorbing one of the four major U.S. railroads, the STB would have to retool a crucial cost-assessment formula that undergirds its rail regulations.
And when it comes to regulation, Buffett has compared railroads with rate-regulated electrical utilities, a comparison rail executives generally are not eager to make.
Shippers are waiting to learn whether and how the acquisition may affect rates, with some shipper attorneys warning a change in BNSF’s valuation could push pricing higher. Buffett, however, said BNSF is entitled to “reasonable” but not “spectacular” returns.
From the outset, Buffett and Matthew K. Rose, BNSF’s chairman, president and CEO, said they expect the deal to move quickly and to be approved by the Securities and Exchange Commission and the Department of Justice.
Days after their announcement, Rose and others from BNSF went through a round of meetings about the deal in the nation’s capital with officials at the STB, the Federal Railroad Administration, the Department of Transportation, lawmakers and labor leaders.
“There’s not a single conversation I’ve had that has been negative” about the deal, Rose told his employees early on. “There are a lot of questions, and there are people we will need to sit down with and discuss this, but overall it has been very well received.”
On Nov. 18, STB Chairman Daniel R. Elliott told the Transportation Research Forum in Washington, “Since the deal was announced, we have been asked whether the STB would have jurisdiction over any aspects of this transaction. That is looking more and more remote.”
One potential issue had been Buffett’s investment stakes — sizable but not controlling — in BNSF’s western-U.S. rival Union Pacific Railroad and in Norfolk Southern Railway in the East.
“Under our rules for exploring mergers,” Elliott said, “it appears Berkshire Hathaway would certainly be considered a non-carrier, because Berkshire has said it would divest its non-controlling number of shares in UP and Norfolk Southern.”
Buffett told a television interviewer on Nov. 13 he’d already sold those shares. “I’ve done that just to facilitate the transaction. I think they’re good investments, but I would have held them if this hadn’t happened.”
Prompted by a rail shipper attorney’s question, Elliott’s chief of staff, Raymond A. Atkins, also said Berkshire taking BNSF private would cause the STB to alter its cost of capital formula.
The agency uses that measure to help judge if rates railroads charge customers to haul regulated cargoes are reasonable relative to costs, including the returns needed to woo equity investors.
It bases part of the formula on stock prices of the four largest U.S. carriers — BNSF, UP, NS and CSX Transportation. After the deal closes, BNSF will not have the equity concerns facing other railroads that still report quarterly earnings.
Other shipper attorneys also warned Buffett’s deal could indirectly push rail charges higher, since STB rules allow a premium paid in a merger to raise a railroad’s network valuation that rates seek to maintain.
Buffett himself indirectly weighed in on rail rates, saying Berkshire when spending money on BNSF’s rail infrastructure would look for a “reasonable” or “decent” return on that investment, “but we’re not entitled to spectacular returns.”
He compared railroads to electrical utilities, which he said provide services that customers must have while those customers may not have a choice in the provider. Berkshire’s widespread holdings include some utility properties.
“When we build electric generation or something of the sort,” he said, in a Nov. 13 television interview, “... we’re building things that are essential to society, and people need our services. They really don’t have any choice in the case of the electric utilities, for example, and sometimes in case of rail. And we should get a decent return on that, enough to encourage us to keep putting money into the business. But we’re not entitled to spectacular returns.”
That was music to the ears of some shipper advocates, who have often compared railroads to utilities given the market control large carriers have over territory and over shippers that are captive to a single railroad for freight shipments. Shippers also take heart that Rose and his management team — well-regarded by many customers as well as Wall Street — plan to stay on.
After some disgruntled shareholders filed suit because the two companies worked out the deal’s price in a fast and private negotiation, Rose notified the company and the SEC he would waive his personal contract clauses that give him substantial extra financial benefits if he leaves BNSF after a change of control.
BNSF spokesman John Ambler said Rose “intends to stay with BNSF. In fact, we do not expect to see any significant change in BNSF leadership as a result of the BNSF-Berkshire Hathaway transaction.”
Contact John D. Boyd at email@example.com.