Off the track
Railroad BNSF and owner Buffett bet on project cargo logistics.
By Eric Kulisch
The recent news that Warren Buffett’s Berkshire Hathaway is partnering with a private equity firm to acquire the iconic H. J. Heinz Co. for $28 billion captured headlines around the world, but less noticed by the mainstream media was the Oracle of Omaha’s purchase of two small freight transportation companies that specialize in moving heavy, oversized cargoes for large infrastructure projects.
In January, BNSF Logistics announced the acquisitions of Toronto-based forwarder Albacor Shipping and EP-Team, a logistics company that arranges expedited air shipments of heavy equipment, vehicles and other oversized cargo for multinational companies. Prices were not disclosed.
BNSF Logistics is a sister company to the largest U.S. railroad, BNSF Railway. Both companies were acquired three years ago by the famous holding company Berkshire Hathaway for $34 billion plus debt. Once a subsidiary of the railroad, the logistics company is a separate entity within the Berkshire portfolio, albeit one with five railroad executives on its advisory board.
Buffett earned his reputation as one of the world’s foremost investors by identifying companies with hidden value long before the rest of the market. As a proxy for Berkshire Hathaway, BNSF Logistics is signaling that project cargo is a promising growth opportunity and company officials say customers have enthusiastically welcomed the arrival of a well-capitalized, North American-based forwarder with global reach that can compete for major logistics projects against foreign firms like Panalpina, Agility, Schenker and Kuehne+Nagel.
Developing nations are rapidly building roads, bridges, railroads, oil and chemical refineries, ports, airports, waste water systems, electric lines, and other infrastructure, while mature economies have huge needs to refurbish aging infrastructure that supports a higher quality of life and economic productivity.
“We see strong demand in project cargo for the next 20 to 30 years,” Jim Craig, BNSF Logistics’ chief marketing officer, said in an interview at the company’s headquarters near Dallas.
BNSF Logistics traditionally provided surface transportation, warehousing and value-added services for retailers, manufacturers and other shippers in North America. It’s also a licensed ocean freight forwarder and customs broker that handles a limited amount of imports and exports in North America. The third-party logistics provider recently began a rapid expansion of services to haul cargo for large industrial projects, primarily helping the energy industry move equipment and materials to new oil-and-gas developments that are sprouting up in places such as Texas, North Dakota, Montana and other states. Its project cargo work usually has a rail element to it. The company, for example, moves Asian-made fuselages imported through the Port of Long Beach to aircraft manufacturer Bombardier’s assembly plants in Canada. The structures are trucked a short distance from the port to a BNSF Logistics facility where cranes lift them onto special railcars for delivery by BNSF Railway.
The Albacor acquisition gives BNSF Logistics an offshore market presence and international offices, and expands its project cargo business beyond North America. Conversely, Albacore and EP-Team can offer their customers transportation service for general cargo in North America via truckload, less-than-truckload and rail, as well expertise in oversized shipments by rail.
Albacor, which also handles general cargo, has locations across North America, Europe and Russia. Craig said the key to the acquisition was Albacor’s capability in Russia.
While Albacor concentrates on arranging all the transportation and support services for big projects that can take months to complete and require extensive advance planning, such as moving a manufacturing plant, tunnel boring machine, cooling tower for a natural gas plant, or huge transformer, EP-Team serves as a “troubleshooter” that primarily manages urgent or emergency deliveries on big cargo jets such as the Russian Antonov-124. The Flower Mound, Texas-based company handles shipments such as parts to repair an oil well blowout, as well as helicopters, satellites and other equipment for commercial and government clients.
EP-Team this year added a semi-submersible service to its portfolio and in late February received its first major project in that discipline, moving an oil rig on a specialized vessel from the Gulf of Mexico to the Middle East.
Large infrastructure projects are often located in remote areas. Logistics companies need strong cash flow because they must purchase expensive equipment, or build support infrastructure such as roads, on the front end prior to getting paid. Project logistics is a highly fragmented industry and smaller firms can have difficulty winning big contracts supporting the mining, civil engineering, oil and gas, wind energy and power generation sectors.
BNSF Logistics, backed by Berkshire Hathaway, has the deep pockets and a new global presence to tackle mega-projects, Craig said. Albacor and EP-Team now have the resources to compete for big jobs.
“When you’re a small organization and have millions of dollars tied up it limits what you can do,” he said. “Before the acquisitions, none of the three entities could engage in a legitimate pursuit of such a project.”
BNSF Logistics generated about $400 million in revenue last year, has strong cash flow and no debt, according to a fact sheet about the deal on Albacor’s Website.
An example of BNSF Logistics’ financial self-sufficiency occurred two years ago when the company had to spend $1.5 million to build a rail-transload facility for a wind energy project in Kansas.
In 2012, Albacor completed support work for the assembly of a gold mine in northern Alberta. The 30-month project, however, had minimal capital requirements because it mostly involved arranging surface transportation and was a local job in Canada, Craig said.
BNSF Logistics recently bid to be the logistics services provider in Mongolia for what is considered one of the largest mining projects in the world.
“This is like logistics on steroids,” Craig said about the scope of the massive project.
Should the logistics provider ever encounter a situation where it needs more resources to bid on a project or make an acquisition it could lean on its ownership group, Craig suggested.
In reality, BNSF Logistics’ executive team has the autonomy to make investment and operational decisions with minimal oversight by its parent. Berkshire Hathaway officials were aware of the Albacor and EP-Team deals, but their involvement is primarily focused on making sure that the acquisition targets would be able to comply with the Foreign Corrupt Practices Act (FCPA). The law makes it illegal for U.S. companies to pay foreign officials for help obtaining contracts, or other business favors, and to cover up the true nature of the payments by making them appear legal on a company’s accounting ledger. The most notable forwarder tripped up by the anti-bribery statute is Switzerland’s Panalpina, which paid off officials in Nigeria to secure preferential customs treatment for shipments it managed. Multinational shippers with strong compliance records are careful about selecting forwarders with similar internal controls because they don’t want to be exposed to any legal liability from the actions of their agents.
BNSF Logistics conducted a “Level 1” audit of every agent and every office connected to Albacor and EP-Team — and even put itself through the same review to ensure it had proper checks and balances in place — before finalizing the acquisitions, Craig said. In all, about 80 locations worldwide were validated.
“If we’re going to offer this level of assurance to the customer, we wanted to make sure our enterprise was clean and compliant,” Craig said about BNSF Logistics applying the same level of scrutiny to itself.
Two agents refused to meet the audit requirements and were terminated, Craig said. They didn’t break any rules, but recoiled from taking on the administrative burden of establishing written policies, documenting their controls and keeping records, he said.
The focus on compliance is doubly important for BNSF Logistics because one of its main selling points is its ability as a U.S. company to understand and adhere to the highest anti-corruption standards.
“We believe there’s some comfort, especially when talking about the FCPA, that a U.S.-based company might be a little more aware of meeting the expectations of the U.S. government versus a foreign entity,” Craig said.
Berkshire Hathaway’s companies also are not compelled to use BNSF Logistics to optimize their freight transportation. There are 56 companies within the Berkshire portfolio, according to the company’s Website, and more than 100 Berkshire Hathaway companies when subsidiaries are included. Craig said BNSF Logistics does business with fewer than 10 of them.
“We go to the companies, make sales calls and pitch our value. The only difference is we can get in the door easier. But we have to earn the business like we would for any company,” he said.
Johns Manville, a roofing and insulation manufacturer, is one of the largest customers of BNSF within the Berkshire Hathaway family.
Albacor employees in U.S. offices have been converted to BNSF Logistics employees, but the rest of the Albacor organization will retain relative independence, Craig said. For now, BNSF Logistics has co-branded the subsidiaries to maintain market awareness, but eventually they will be fully integrated parts of the organization, according to a fact sheet on Albacor’s Website. Craig stressed senior management will remain in place and shippers will still deal with the same operational staff at both forwarders.
All three companies have offices in Houston which are in the process of being consolidated, Craig said.