No hang-ups likely on railroad buy; analyst unsold on Stanley deal; doubt plagues Denbury

By Cristal Cody

Tupelo, Miss., Nov. 3 - Warren Buffet's Berkshire Hathaway Inc. surprised the market on Tuesday with plans to acquire Burlington Northern Santa Fe Corp. for $44 billion in cash, stock and debt in its biggest deal yet.

The buyout is a move in the right direction, analysts told Prospect News on Tuesday.

Also on Tuesday, Black & Decker Corp. executives discussed the company's $4.5 billion takeover by Stanley Works, but at least one analyst said in an interview that he's "not sold" on the deal.

In other situations, a market observer said some doubt lingers on whether Denbury Resources Inc. will complete its $4.5 billion takeover of Encore Acquisition Co.

Meanwhile, stocks closed mixed on Tuesday.

The Dow Jones Industrial Average slipped 17.53 points, or 0.18%, to 9,771.91.

The Standard & Poor's 500 index inched up 2.53 points, or 0.24%, to 1,045.41, and the Nasdaq Composite index closed up 8.12 points, or 0.40%, at 2,057.32.

Working on the railroad

Berkshire said Tuesday the company will pay $100 a share in cash or stock to acquire the remaining 77.4% of shares of Burlington Northern Santa Fe that it does not already own.

The deal includes $10 billion of outstanding railroad debt and represents a 31.5% premium to Monday's closing stock price.

"Our country's future prosperity depends on its having an efficient and well-maintained rail system," Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer, said in a statement. "Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry. Most important of all, however, it's an all-in wager on the economic future of the United States. I love these bets."

The transaction requires approval by holders of two-thirds of BNSF's outstanding shares and antitrust approval by the U.S. Department of Justice. The companies expect the acquisition to close in the first quarter of 2010.

One analyst told Prospect News on Tuesday that the Justice Department is unlikely to hang the deal up.

Fort Worth-based BNSF operates 32,000 miles of routes throughout 28 states.

"Other than that, there shouldn't be anything," the analyst said. "They're going to keep the current management structure intact, and Berkshire will just be the holding company."

In a conference call on Tuesday, Tom Hund, BNSF's chief financial officer, said the company expects to file its proxy statement by mid-month.

"We anticipate that we would call a shareholder meeting during the first quarter of 2010 to seek a vote approving the transaction," Hund said. "And assuming we receive shareholder approval, we expect to close the transaction very shortly thereafter."

Prospect News also spoke with Langen McAlenney analyst Paul Howard, who said the transaction offers plenty of potential.

"We've certainly been in a tough economy the last quarters, and [Buffet's] taking a longer view [that] the demand for rail is going to pick up," Howard said. "Also the wildcard is the government providing economic incentives or tax rebates to try to make a better environment - that could play well into Burlington Northern's value."

Although the acquisition is Buffet's largest to date, it doesn't mean Berkshire is finished with deals.

"In terms of cash, it shows [Buffet] continuing on the acquisition spree," Howard said. "With the stock and debt he's throwing into the deal, he can continue with the game plan going into 2010. It is a big entity to acquire, but I think the ability to keep looking at new potential targets in the future will still be there."

Shares of BNSF gained $20.93, or 27.51%, to close Tuesday at $97.00.

Berkshire's class A shares closed up 1.72% at $100,450.00, while the class B shares added 1.85% to end at $3,325.35.

Black & Decker touts combo

On Monday, New Britain, Conn.-based Stanley Works said it will offer Black & Decker shareholders a fixed ratio of 1.275 shares for each share of Black & Decker, an offer that represents a premium of 22.1% to Black & Decker's stock price on Friday. The deal values Towson, Md.-based Black & Decker at $3.46 billion.

In a conference call with analysts and investors on Tuesday, Black & Decker chief executive officer Nolan Archibald said the deal "had noting to do with the current economic condition. Both companies were weathering this downturn extremely well. Cash flows of both companies were very healthy."

Archibald said he received a telephone call six months ago from John F. Lundgren, Stanley's chairman and CEO, to discuss a transaction and the two met for lunch in June.

"The more we talked, the more we realized the significant shareholder value that could be created by a combination of these two," Archibald said. "Historically, this is a romance that started approximately 28 years ago. On three different occasions, CEOs of Stanley and Black & Decker had talked about a merger."

The new company's name will be Stanley Black & Decker.

Executives said Black & Decker, the market leader in power tools, and Stanley, the leader in consumer hand tools, offer a good fit with no overlaps in products.

The transaction is subject to regulatory clearances and approvals from shareholders of Stanley and Black & Decker.

The deal is expected to close in the first half of 2010.

But not all are enamored.

"It's in the eye of the beholder," Bentley Offutt, an analyst with Offutt Securities, Inc. said in an interview on Tuesday.

Offutt said he's "not sold" on the deal and doesn't see Black & Decker's attraction to a takeover.

"Black & Decker is bringing an awful lot to the party," he said. "I realize they're getting a premium for it, but not on a long-term basis. Black & Decker has the dominant brand name worldwide in the power tool area. The company's earnings for the entire year have been running ahead of analysts' expectations."

Black & Decker shares soared $14.66, or 30.97%, to close at $62.00 on Tuesday.

Stanley shares jumped $4.54, or 10.06%, to $49.69.

Uncertainty falls on Denbury

Shares of Denbury fell more than 10% on Monday after the company announced the deal and shares slipped another 19 cents, or 1.45%, to close Tuesday at $12.90.

Encore's stock lost 14 cents, or 0.31%, to close Tuesday at $44.53, well off Denbury's offer for $50.00 a share in cash and stock.

The Plano, Texas-based oil producer said Sunday that it will acquire Fort Worth, Texas-based Encore, an oil and natural gas reserves developer.

The offer for Encore includes $15.00 in cash and $35.00 in Denbury stock, which is subject to a 12% collar range. Denbury expects to issue 115 million to 146 million shares to fund the equity portion of the deal.

"We attribute a large portion of the discount to the cost of financing the hedge due to the collared structure of the offer," a market observer said Tuesday.

The transaction must be approved by Denbury and Encore stockholders and receive regulatory clearances. The acquisition is expected to close in the first quarter of 2010.

Although Encore shareholders are likely to give their approval for the deal, there is "some risk involved in Denbury's shareholder approval," the source said. "The acquisition of Encore will stretch Denbury financially with debt/book cap rising to 48% from 41% and the ratings agencies reviewing Denbury for downgrade."

The acquisition also includes the assumption of debt and Encore's minority interest in Fort Worth-based Encore Energy Partners LP.

Shares of Encore Entergy Partners rose 2 cents, or 0.11%, to $18.00

Mentioned in this article:

Berkshire Hathaway Inc. NYSE: BRK.A, BRK.B

Black & Decker Corp. NYSE: BDK

Burlington Northern Santa Fe Corp. NYSE: BNI

Denbury Resources Inc. NYSE: DNR

Encore Acquisition Co. NYSE: EAC

Encore Energy Partners LP NYSE: ENP

Stanley Works NYSE: SWK

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