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MONTREAL - Canada's two largest railways enjoyed a "Buffet bounce" on Tuesday after legendary U.S. investor Warren Buffet announced he will pay a premium price for Burlington Northern Santa Fe.

Shares of CN Rail (TSX:CNR) and Canadian Pacific (TSX:CP) jumped in early trading on news of the investment by Berkshire Hathaway, which values BNSF at US44 billion, including US$10 billion of debt.

Berkshire Hathaway's offer was valued at US$100 per share in stock and cash, or US$26 billion for about three-quarters of the railway's stock, a 32 per cent premium to Burlington Northern's share price at the end of Monday.

Despite a slight pullback from their peaks, Canadian National's shares closed up 85 cents, or 1.62 per cent, to $53.42, while CP's shares gained $1.38, or 2.92 per cent to $48.60 in trading on the Toronto Stock Exchange.

Edward Jones analyst Dan Ortwerth said the railway industry's appeal was buttressed by the Oracle of Omaha's investment.

"Buffet's move today is really a kind of validation of the positive long-term view of the rail industry that we have," Ortwerth said.

CN and Burlington National are viewed as the two best-run railways in North America, he said.

But even average railways stand to benefit in the long-term as rising fuel costs gives the sector a competitive advantage over the trucking industry, Ortwerth added.

While analysts expected Buffet's acquisition would boost railroad shares on both sides of the border, they doubted it would lead to a wave of industry takeovers or consolidations.

There have only been small acquisitions since the U.S. regulator published new rules in 2001 that largely precluded Class 1 railroad mergers.

"We consider this deal to be a high profile vote of confidence in the attractive value of the sector - and a key catalyst for valuations for the group as a whole," wrote Walter Spracklin of RBC Capital Markets.

David Newman of National Bank Financial said Buffet's acquisition represented an all-in wager on the economic future of the United States.

He said Berkshire may be seeking an indirect exposure to coal in the Powder River Basin which costs 48 per cent less than other U.S. coal beds, even after considering higher transportation costs and emission allowances.

"It costs about 70 to 85 per cent less to mine the coal from PRB's surface mines and it contains 30 to 75 per cent less sulphur, which bodes well for future growth," he wrote in a report.

Newman expects rail volumes, which have suffered during the recession, will improve next year. He estimates CN's revenues will increase by 10.6 per cent in 2010, while CP's rise by 5.3 per cent.

The Canadian railways also saw their share values jump more than two years ago when Buffet increased his stake in BNSF to nearly 11 per cent.

Subsequent purchases increased his holdings to 22 per cent.