Union Pacific biting at Burlington as Buffett readies $26bn bid
Warren Buffett and Bill Gates face a roadblock on the route towards a payoff on their investment in US freight transportation.
Chicago, whose railroads made it hog butcher for the world a century ago, is a tangle of bottlenecks where a quarter of America's rail freight stalls while trying to navigate the city.
"We can't keep running trains from Los Angeles to Chicago in 55 hours and then take 36 hours to get a rail car from one side of Chicago to the next," said Matt Rose, CEO of Burlington Northern Santa Fe. "We either need to fix Chicago or avoid it."
For Buffett (79), a solution could help overcome scepticism about his $26bn (e19bn) bid for Burlington, which shareholders are to vote on tomorrow. For the Chicago area, speedier passage could head off a loss of rail traffic, jobs and tax revenue when the city is coping with a drop in trade-show business.
Part of the answer may come from CalPERS. The California Public Employees' Retirement System is backing two and possibly three rail yards outside Chicago to handle intermodal freight -- containers that switch between ships, trains and trucks.
The yards would help reduce the typical day-and-a-half slog across the city's intersecting Amtrak, commuter train and freight tracks, helping railroads in their quest to take more shipping from the trucking industry.
The first is a $1b Burlington yard that opened in 2002.
CalPERS' real estate unit, CenterPoint Properties Trust, is scheduled to open a $2bn Union Pacific facility nearby in September. Negotiations are under way with Canadian National Railway for a third yard, said Michael Mullen, CenterPoint's chief executive.
The Bill & Melinda Gates Foundation is one of Montreal-based Canadian National's 10-biggest shareholders, with 1.8pc of the stock. Michael Larson of Cascade Investment in Kirkland, Washington, investment manager for Gates (54), didn't return calls seeking comment.
A train ride through Burlington' s new yard caught Buffett's attention, said Mr Rose. He briefed the Berkshire Hathaway chairman on the rail connections to the West Coast and on a surrounding network of distribution centres in April 2008, a year after Buffett first invested in Burlington.
"He loved it," said Mr Rose. Nineteen months later, Buffett offered to buy the rest of the Texas-based company.
He was impressed by how the facility worked with big retailers such as Wal-Mart, Mr Rose said. Wal-Mart owns a distribution centre half a mile away to receive goods arriving from Asia.
But success in railroads now hinges on which companies best take advantage of intermodal shipments, which produce more revenue per carload than other freight. Donald Broughton, a St Louis-based analyst for Avondale Partners LLC, has a "buy" rating on Union Pacific because it is winning intermodal freight from Burlington.
By the end of 2009, Burlington's weekly lead over Union Pacific in intermodal container shipments had dwindled to 11,355 from 32,500 in late 2008, Broughton said in a report. Omaha, Nebraska-based Union Pacific is the biggest US railroad by sales. It had revenue of $14.1bn last year, compared with $14bn for Burlington.
Union Pacific is likely to capture even more business from Burlington, Broughton said, when its intermodal yard opens in September about 60km southwest of Chicago in Joliet. Union Pacific shares have gained 12pc in the wake of the Burlington agreement, while Canadian National's have gained 2.4pc. (Bloomberg)