Warren Buffett's Berkshire Hathaway Inc on Tuesday agreed to buy Burlington Northern Santa Fe (BNSF) Corp, making a $34 billion bet on the future of the United States (US) economy.

Burlington Northern, the second-largest US railroad, is the biggest hauler of food products like corn and coal for electricity, making it an indicator of the country's economic health.

The railroad also ships a large amount of goods from Western ports including everyday items such as refrigerators, clothing and TVs.

Analysts say Buffett is planting both feet in an industry that is poised to grow as the economy gets back on solid ground. If approved, it would be the biggest acquisition ever for Berkshire Hathaway Inc.

Berkshire Hathaway already owns about 22 per cent of Burlington Northern, and said it will pay US$100 a share in cash and stock for the rest of the company, a 31.5 per cent premium on Burlington Northern's Monday closing price.

Shareholders have the option to convert their stock for a cash payment of US$100 per share, or receive Berkshire Class A or Class B common stock.

Huge bet

Up to 60 per cent of the deal is cash and 40 per cent is in stock.

"Berkshire's US$34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry," Buffett said in a statement.

"Most important of all, however, it's an all-in wager on the economic future of the United States. I love these bets," he said.

The majority of the stock in the deal will be Berkshire's 'A' shares, but Berkshire's board also approved a 50-for-1 split of its Class B common stock for holders of smaller amounts of Burlington shares who opt for a share exchange rather than cash.

Berkshire's Class B shares closed Monday at US$3,265. With the split, each share will be worth US$65.30.

Burlington shares shot up US$21.33, or 28 per cent to US$97.40 in morning trading. Shares of other major rails, including Burlington's larger rival Union Pacific Corp, rose as well.

Berkshire also owns stock in two other major US railroads - 9.56 million shares of Union Pacific Corp and 1.93 million shares of Norfolk Southern Corp, as of June 30.

The deal for Burlington Northern has been approved by the boards of both companies, but still needs two-thirds approval of Burlington's shareholders and antitrust clearance.

The railroad expects to clear those hurdles in the first three months of next year.

Last week the railroad reported third-quarter profit dropped 30 per cent to US$488 million, or US$1.42 per share, as consumers continued to hold back on buying retail goods and industrial production struggled.

Burlington was one of the least optimistic among major railroads about the pace of economic recovery. CEO Matt Rose said consumers are going to be the driver of any improvement in the economy, but no one is buying yet.

Reaping rewards

Analysts say Buffett is looking for an investment that will reap rewards for many years into the future, and isn't so concerned about immediate gains.

"(Buffett is) buying at the trough - things aren't going to get much worse. He's getting in at a good time," said Art Hatfield, an analyst with investment firm Morgan Keegan.

Hatfield said he believes Buffett went for Burlington Northern in part because of its good management team, an important aspect in any of the billionaire's deals.

Hatfield also said that Burlington Northern has been more progressive than its peers in developing new technology, allowing it to be more profitable. Major railroads have been able to slash costs during the recession by cutting jobs, parking railcars and making strides to improve train speeds and other metrics that improved efficiency.

- AP