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, is priced at a premium of 31.5 percent over BNSF's closing stock price on Monday and values the railroad at $34 billion.

It's an all-in wager on the economic future of the United States, Buffett said in a statement, adding that railroads are key to the U.S. economy and will benefit as recovery takes hold. I love these bets.

To help ease the way for the deal, Berkshire's board approved a 50-for-1 split of the company's Class B common stock, its first split ever under Buffett.

Berkshire will pay $100 per share in cash and stock for the 77.4 percent of BNSF shares it does not already own. Berkshire will also assume $10 billion of BNSF debt. The deal is expected to close in the first quarter of 2010.

The deal comes as the U.S. economy is beginning to recover from its worst downturn since World War II. 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.

BNSF, which operates in the U.S. West and Midwest, said in September it was seeing an uptick in freight volume and was encouraged by an improvement in consumer-related markets.

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.

Observers questioned whether Buffett will have to sell his holdings in other railroads to win regulatory approval for the BNSF deal. Berkshire had a 1.9 percent stake in Union Pacific Corp, or 9.56 million shares, as of June 30, and a 0.5 percent stake in Norfolk Southern Corp, or 1.93 million shares, according to Thomson Reuters data.

For the market, it can be seen as a sign of confidence (about the economy), said Peter Boockvar, equity strategist at Miller Tabak + Co in New York. Berkshire is seeing way past some impending economic recovery signs now and looking into the future, he said.

Berkshire 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 and borrow the rest.

RAILS RALLY

BNSF shares were up 28.4 percent to $97.65 in early trading on the New York Stock Exchange. Among its rivals, Union Pacific shares gained 5.7 percent to $58.18, Norfolk Southern jumped 5.7 percent to $49.30, and CSX Corp was up nearly 7 percent to $45.80. Canadian rail shares also rallied.

We'll have more people moving more goods 10, 20, 30 years from now, Buffett, Berkshire chairman and CEO, said on CNBC television. I just believe this country will prosper.

He said he was not interested in buying the rest of BNSF rival Union Pacific. He said he expected the companies to remain rivals for the next half century.

We won't be making any huge deals for a while, he told CNBC. I made (BNSF CEO Matt Rose) an offer and he said he would take it to his board and it took about 15 minutes.

BNSF, with its Western presence, is a key shipper of Asian goods into the interior of the United States and is 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 most valuable U.S. railroad by market capitalization. By comparison, Union Pacific has a market cap of about $28 billion, while Norfolk Southern and CSX are each worth about $17 billion, according to Thomson Reuters data.

BNSF's 2008 revenue of $18 billion was tops among U.S. railroads, about $1 billion ahead of its nearest rival, 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, or a 7 percent stake, as of June 30, according to data collected by Thomson Reuters. The firm was the largest shareholder after Buffett.

BETTING ON THE FUTURE OF COAL

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

Because Burlington Northern moves coal around the country, I think Buffett is trying to get into coal but doing it in a cheaper way, he said. It's leveraged against coal's demand without actually having to buy the commodity itself.

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, he said.

Berkshire said the 50-for-1 split of its Class B shares, which is subject to shareholder approval, would make it easier for smaller BNSF shareholders to swap their stock for Berkshire stock. Class B shares were up 1.5 percent to $3,313.50 in early trading.

Buffett, one of the world's richest men and one of its most revered investors, is known for making big long-term bets. He wrote in The New York Times in October 2008 that he had been buying American stocks in his personal account, a few weeks after the collapse of Lehman Brothers set off worldwide selling.

Fears regarding the long-term prosperity of the nation's many sound companies make no sense, Buffett wrote at the time.

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

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