2021: How will the Kansas City Southern merger impact railroads?
BECKY QUICK: This next question is for Greg, but also for Warren and Charlie. It’s from Blair Miller who asks, “What does the combination of Kansas City Southern with either Canadian Pacific or Canadian National mean to BNSF in terms of competition? Do you think the synergies of the merger will justify the multiple paid?”
GREG ABEL: Sure. It’s obviously a transaction we followed very closely with both Canadian National and Canadian Pacific bidding to purchase Kansas City Southern. Either of those companies acquiring Kansas City Southern will have an impact on BNSF. What they’re basically proposing is to create a north/south railway that goes from Canada into Mexico. We do have a strong presence in Mexico, not as strong as some of our competition, but we would feel competition there. We’ll follow that transaction very closely as it goes before the Surface Transportation Board. The standard that will be applied is that competition has to be protected or enhanced, so that’s our opportunity to protect our franchise on behalf of our customers. We move intermodal business both in and out of there on behalf of certain customers. We’ll want to protect the rights of our customers there, so we’ll be active in the approval process. But there’s no question, at the end it impacts our franchise. Warren.
WARREN BUFFETT: Yeah, it’s not huge, but it affects both the Union Pacific and BNSF to a small degree, a relatively small degree. But that’s not really the worry of the Surface Transportation Board. Their job is to do what’s best for the shippers. In terms of the price that’s being paid, like I say, if you can borrow all the money for nothing, it doesn’t make much difference to people. This would not be being paid under a different interest rate environment. I mean, it’s very simple. There’s no magic to the Kansas City Southern. I think their deal with Mexico ends in 2047. It’s the number of carloads carried. I mean, it’s not going to change that much, but it is kind of interesting. There’s only two major Canadian, what they call Class I railroads, and there’s five in the United States. This will result in, essentially, three of the units being Canadian, four being U.S., which is not the way you normally think of the way the development of the railroad system would work in the United States. We’ve talked about it plenty and CPE, either Canadian Pacific, or Canadian National is very likely to get it. I think the Surface Transportation Board book voted four to one, didn’t they the other day? It didn’t get… Am I correct on-
GREB ABEL: They voted on an initial trust structure that they had to approve for Canadian Pacific. That was a four-to-one vote, as you noted, Warren, so they’re moving forward with the evaluation of it.
WARREN BUFFETT: Yeah. Normally railroad deals are very long, take a long time for them to evaluate. But in this case, I think they have two opposing trust proposals, and in effect, if they make a quick decision on which trust proposal that they allow, I don’t see they’ll allow two proposals exactly, so it may be a very accelerated decision. I don’t know. It’s up to the Surface Transportation Board to do what’s what’s best for what their obligation is to the country to do.
BECKY QUICK: There was a follow-up question on that.
WARREN BUFFETT: Sure.
BECKY QUICK: Do you think the valuation that they’re paying is worth it?
WARREN BUFFETT: Well, in a very, very mild way. I mean, everybody’s kind of played at making deals with different railroads ever since I’ve been in the railroad business. We’ve talked about it. When CP, when Hunter Harrison came after it… Was it Hunter that bid on CP that kind of lead the way? We looked at buying CP. Everybody looks at everything. We would not pay this price. It implies a price for BNSF that’s even higher than what the UP is selling for. But it’s kind of play money to some degree, I mean, when interest rates are this low. I’m sure from the standpoint of both CP and CN, there’s only one K.C. Southern. They’re not going to get a chance to expand. They’re not going to buy us. They’re not going to buy the UP. The juices flow, and the prices go up.
CHARLIE MUNGER: They’re buying with somebody else’s money.
WARREN BUFFETT: Yeah. It’s somebody else’s money, and you’re going to retire in five or 10 years. People are not going to remember what you paid, but they’re going to remember whether you built a larger system. The investment bankers are cheering you on at every move. They’re just saying, “You could pay more.” They’re moving the figures around. The spreadsheets are out, and the fees are flowing.