Kansas City Southern plans to accept Canadian Pacific’s $27 billion bid

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Canadian National now has until the end of Friday to submit a better offer or lose its deal with Kansas City Southern (NYSE:KSU). At stake is the creation of the first direct railway linking Canada, the United States and Mexico.

Kansas City Southern’s change of heart came after the U.S. Surface Transportation Board (STB) rejected a temporary “voting trust” structure last month that would have allowed Kansas City Southern shareholders to receive the $325-per-share cash-and-stock consideration under the deal with Canadian National without having to wait for full regulatory approval.

Canadian Pacific has had its proposed voting trust cleared by the STB. The regulatory certainty this provided convinced Kansas City Southern’s board to switch to a deal with Canadian Pacific, even though its offer was lower than Canadian National’s, according to people familiar with the deliberations.

There is a silver lining for Kansas City Southern. The Canadian Pacific offer it now plans to accept, worth $300 per share in cash and stock, is better than the $275 per share cash-and-stock deal that the two companies had clinched in March, before Canadian National gatecrashed it and entered into an agreement with Kansas City Southern in May.

Were Canadian National to lose out to Canadian Pacific, it would receive from Kansas City Southern a $700 million break-up fee and would be reimbursed for another $700 million it paid Kansas City Southern to pass on to Canadian Pacific as a break-up fee for terminating their March deal. Canadian Pacific has said it will cover the cost of this $1.4 billion that Kansas City Southern would owe Canadian National.

Canadian National has also faced pressure from some of its investors, including hedge fund TCI Management Ltd, to abandon its pursuit of Kansas City Southern.

Canadian National did not immediately respond to a request for comment on its next steps.

The STB said last month that even though the overlap of Canadian National’s and Kansas City Southern’s networks was confined to 70 miles (113 km) between Baton Rouge and New Orleans, the two railways operated parallel lines in the central portion of the United States and could be under less pressure to compete if the voting trust for that deal was approved. It added that it was not making a final determination on whether the competitive issues that the deal faced could be resolved under a full regulatory review.

U.S. President Joe Biden has issued sweeping executive orders aimed at promoting competition in the U.S. economy. One order encouraged the STB to consider Amtrak’s statutory rights when assessing whether a rail merger is in the public interest.

Passenger railroad Amtrak, majority owned by the U.S. government, had opposed the Canadian National’s voting trust, saying its pledge to divest the Baton Rouge to New Orleans line will harm future passenger service in Louisiana.