What Could Buffett Buy For $22 Billion? Canadian Pacific

Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK-A), during the firm’s annual meeting, claimed that he looked at a huge buyout recently, which would have cost $22 billion. Buffett says he did not make a deal because he would have needed to sell some of Bershire’s equity holdings to do so. The man, considered by many as the greatest investor of the last fifty years, probably did not raise the matter randomly. Berkshire is back in the M&A market.

Buffett’s largest investment so far was the buyout of railroad Burlington Northern Santa Fe in 2010. The price for that transation was $26.5 billion. Buffett said he believed that Burlington was a bet on a large part of the American economy because of breadth of businesses which are touched by the railroad industry.

Another large North American railroad may change hands in the next few months, at least in terms of who runs it. Famous hedge fund Bill Ackman, who oversees Pershing Square, is in a proxy war for control of the huge Canadian Pacific Railroad. The board of the railroad received grim news recently. Advisory firm Institutional Shareholder Services backed Pershing’s seven director slate. If the slate wins election, Ackman will replace the Canadian Pacific CEO and gain control over the company, although his firm owns only 14.1% of outstanding shares.

Buffett has played white knight to companies several times in the past, and gotten good bargains in the process. He invested $5 billion in Goldman Sachs (NYSE: GS) in September 2008–at the height of the financial crisis. The moved was viewed as an essential sign of support that the bank could ride out the unprecedented crisis. Buffett made a large profit on the transaction, and Goldman received visible support which was critical to its future.

Perhaps the only credible alternative that the Canadian Pacific board has to fight off Ackman is an offer from Buffett to take a control interest in the company. Its market cap is $12.7 billion. Its shares, at $74.21 are at a 52-week high, largely because of the belief that Ackman can squeeze value out of the railroad’s assets.

Buffett would need to believe that Canadian Pacific has the same kind of promise that Burlington Northern Santa Fe does. That is probably not a great leap of faith given how closely the two businesses are to one another. A control share in Canadian Pacific would cost about $8 billion, based on a modest premium to the share price. Buffett can afford that, and probably without selling any of his equity portfolio.

Douglas A. McIntyre