Fat Pitch Take on Burlington Northern Santa Fe

As a follower of Warren Buffett, I learned about Berkshire Hathaway’s (BRK-A) acquisition of Burlington Northern Santa Fe (BNI) early yesterday morning. Most value investors probably were interested in learning more about how Mr. Buffett valued BNI. What is the intrinsic value of BNI? What kind of margin of safety did Buffett’s $100 per share offer represent? Was Warren Buffett revealing anything about the value of Berkshire Hathaway shares by offering Burlington Northern shareholders the option of $100 in cash or Berkshire Hathaway shares?

However, the first thing I thought of was would this potentially present a fat pitch special situation opportunity. Warren Buffett always keeps his word on merger deals. Could the Burlington Northern offer create another Constellation Energy Group (CEG) opportunity?

As you might recall, last year I made some significant profits from the Constellation Energy Group merger arbitrage. Berkshire Hathaway’s MidAmerican Energy Holdings offered $26.50 per share in cash for Constellation Energy. After the deal was announced, the price of CEG shares drift down to as low as $15 and then up to $30 last year. Mr. Market sure got moody, even with Mr. Buffett at the helm of that deal. Could the same thing happen again with BNI?

I decided to ask my Twitter followers. Here’s my question and their responses:

FatPitch: I’m hoping $BNI will dip down to $90 in the coming weeks. Do you think it will happen? Lower?

rationalwalk: @FatPitch Can’t see BNI slipping to $90…. would require crash in BRK shares well below $80K to do that.  Very, very unlikely.

marketfolly: @FatPitch could happen if market dives as many predict. at same time, few merger/arb plays out there right now; funds swarm to same plays

ModernGraham: @FatPitch If it does, it would be Mr. Market at his finest – there’s no reason for it to be anything but $100 now

MrMarketBlog: @FatPitch I doubt it. I don’t think anyone is going to doubt Warren getting this deal done

vlad0: don’t underestimate irrationality

What are your thoughts on the potential for arbitrage profits with the Burlington Northern Santa Fe deal? Share them in the comments section below or follow me on Twitter.

4 thoughts on “Fat Pitch Take on Burlington Northern Santa Fe

  • November 4, 2009 at 11:36 am

    Was talking with my wife about this and her savvy opinion is that Buffet is predicting growth in rail shipping coming soon. Does his crystal ball forecast a stirring of the economic bull?

  • November 4, 2009 at 12:47 pm

    it’s hard to judge the arb play without the details of the stock part of the offer.
    for 97.30 (right now) you probably get at least two dividend payments of 0.40, and 100 cash if you want cash.
    deal likely done in less than six months, call it eight to be safe. if you get two divs, the deal closes before the third (less than seven months) you make 3.50 on 97.30, just about 3.6% or greater than 7.2% annualized.

    not bad, but not great. at $95 it’s an interesting arb for sure.
    I’ve got what used to be a 5% position in BNI because I thought it was worth 125 in mid-2007 and 2008. when constant slow growth seemed inevitable and the right of ways are priceless. I’d like to get at least 110, but will probably take Brk shares and put off the taxes depending on the exchange rate.

  • November 5, 2009 at 1:05 am

    This is a simple arb, nothing more. Don’t forget to model the 60/40 proration. There is little optionality here.

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