Warren Buffett's Berkshire Hathaway Inc will pay $26 billion to buy out railroad Burlington Northern Santa Fe Corp in what the billionaire investor called a bet on the U.S. economy.

The deal, Buffett's biggest-ever acquisition, marks new interest in a storied but highly cyclical American industry that has tried to reinvent itself by emphasizing its ability to move goods cheaply and efficiently.

The deal is priced at a premium of 31.5 percent over BNSF's closing stock price on Monday and values the railroad at $34 billion. BNSF shares jumped 28 percent in morning trading; other U.S. and Canadian rail companies also rose.

It's an all-in wager on the economic future of the United States, Buffett said in a statement, adding railroads will benefit in a recovery. I love these bets.

Reversing his long-time opposition to share splits, which has resulted in the highest per-share price of any stock on the New York Stock Exchange, Buffett agreed to a 50-for-1 split of Berkshire's Class B shares, which will make the stock much more accessible to retail investors.

The Class B shares trade at over $3,000, and the Class A shares at more than $100,000. Both were up about 1.5 percent.

Buffett, one of the world's richest men and one of its most revered investors, is known for making big long-term bets. In October 2008, soon after the collapse of Lehman Brothers set off worldwide selling, he wrote in The New York Times, Fears regarding the long-term prosperity of the nation's many sound companies make no sense.

Berkshire will pay $100 per share in cash and stock for the 77.4 percent of BNSF shares it does not already own, and will also assume $10 billion of BNSF debt. It will pay about $16 billion in cash and the rest in stock. Of that $16 billion, it will pay $8 billion from its own cash.

Berkshire could not do an all-stock deal because it would deplete its capital beyond what insurance regulators would allow, said Justin Fuller, an analyst at Midway Capital Research & Management in Chicago and author of the Buffettologist.com blog.

Berkshire's biggest holdings include insurers like Geico, although it has close to 80 operating units that provide such products as carpeting, natural gas, ice cream, paint and underwear.

They tend to accumulate capital faster than they know what to do with it, and this is a really good deal for them, Fuller said. It will create a lot of value for Berkshire.

The deal, expected to close in the first quarter of 2010, comes as the U.S. economy is beginning to recover from its worst downturn since World War Two. U.S. gross domestic product grew at a 3.5 percent annual rate in the third quarter, the first quarterly growth in more than a year.

RECOVERING ECONOMY

BNSF, the No. 1 U.S. railroad by revenue, operates in the U.S. West and Midwest. It said in September that freight volumes were recovering and it was encouraged by an improvement in consumer-related markets.

Berkshire is seeing way past some impending economic recovery signs now and looking into the future, said Peter Boockvar, equity strategist at Miller Tabak + Co in New York.

U.S. railroads in recent years have invested in new technology and improved the efficiency of operations, while arguing their method of transport is cheaper and cleaner than shipping goods by truck.

Buffett told CNBC television the deal came together quickly. I made (BNSF CEO Matt Rose) an offer and he said he would take it to his board and it took about 15 minutes, he said.

He added, We won't be making any huge deals for a while.

With Berkshire's support, BNSF will be able to invest in its infrastructure and not have to worry about meeting quarterly expectations, said Thomas Russo, a partner with Gardner Russo & Gardner in Lancaster, Pennsylvania, which counts Berkshire as its second-largest holding.

RAILS RALLY

BNSF, with its Western presence, is a key shipper of Asian goods into the U.S. interior and the leading shipper of coal and agricultural commodities, according to analysts at Robert W. Baird.

About a third of BNSF's revenue comes from intermodal freight -- containers that can be moved from ship to rail or truck -- 23 percent from coal, and 19 percent from farm goods.

The deal makes Fort Worth, Texas-based BNSF the top U.S. railroad by market capitalization. By comparison, Union Pacific Corp has a market cap of about $28 billion, while Norfolk Southern Corp and CSX Corp are each worth about $17 billion, according to Thomson Reuters data.

BNSF's 2008 revenue of $18 billion was about $1 billion ahead of its nearest rival, Union Pacific.

BNSF shares were up 28.3 percent at $97.59 in morning trading on the New York Stock Exchange. Union Pacific gained 6.7 percent to $58.71, Norfolk jumped 4.1 percent to $48.53, and CSX was up 6.2 percent at $45.51.

Canadian National Railway shares rose 2.6 percent to C$53.96, while Canadian Pacific rose 4 percent to C$49.11.

Observers questioned whether Buffett will have to sell his other rail holdings to secure regulatory approval of the BNSF deal. Berkshire held a 1.9 percent stake in Union Pacific Corp as of June 30, and a 0.5 percent stake in Norfolk Southern, according to Thomson Reuters data.

Buffett said he was not interested in buying the rest of Union Pacific.

Los Angeles-based money manager Capital Group Cos, which oversees the $780 billion American Funds family of mutual funds, is likely one of the big winners in the deal.

The firm's fund unit held 23.2 million BNSF shares, a 7 percent stake, as of June 30, according to Thomson Reuters data. The firm was the largest shareholder after Buffett.

BETTING ON COAL

Some analysts said the deal did not necessarily signal a wave of mergers and acquisitions in railroads.

For an outsider to make an acquisition of a railroad or invest a significant amount in a railroad -- you may see more people get interested in that possibility, said George Van Horn, senior analyst with market research firm IBISWorld.

But as far as seeing railroad themselves merging, I wouldn't expect that right away, Van Horn said.

The deal was a bet on the future of coal, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Buffett is trying to get into coal but doing it in a cheaper way, Ablin said. It's leveraged against coal's demand without actually having to buy the commodity itself.

Berkshire said the 50-for-1 split of its Class B shares, subject to shareholder approval, would make it easier for small BNSF shareholders to swap their stock for Berkshire stock.

Goldman, Sachs & Co and Evercore Partners Inc acted as financial advisers to BNSF, and the company's legal counsel is Cravath Swaine & Moore LLP. Berkshire's transaction counsel is Munger, Tolles & Olson LLP.

(Reporting by Nick Zieminski; Additional reporting by Angela Moon, Christopher Kaufman, Lilla Zuill, David Gaffen, Paritosh Bansal, Aaron Pressman, Ryan Vlastelica, Helen Chernikoff and Jonathan Stempel; editing by John Wallace)

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