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Kansas City Southern agrees to CN Rail merger, rejecting CP’s bid

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Kansas City Southern has abandoned its agreement to be acquired by Canadian Pacific, choosing instead a competing bid from Canadian National Railway with a bigger price tag, but also greater regulatory risks.

The decision Friday comes one day after Canadian Pacific said that it wasn’t budging from its initial $25 billion buyout agreement made in March, even after Kansas City Southern said that a richer $33.6 billion bid from Canadian National appeared to be superior.

Read more: Canadian Pacific Railway has big decision after KCS says CN has superior offer

Canadian Pacific has consistently argued that a tie-up between Kansas City and Canadian National would have trouble getting approved by antitrust regulators and as recently as Thursday, said that it would not boost its original offer. Canadian Pacific has asserted that their combination with Kansas City Southern is most likely to get a green light from regulators.

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U.S. regulators haven’t approved any major railroad mergers since the 1990s, and officials have said that any deal involving one of the handful of Class 1 railroads, a group that includes Kansas City Southern, must enhance competition and serve the public interest.

While Kansas City Southern is the smallest of the major railroads operating in the U.S., it controls key routes that connect the U.S. and Mexico, making it a very desirable prize and a potential antitrust hazard for a competing railroad that wants to own it.

Read more: Kansas City Southern to scrap railroad deal with CP after CN ups bid to $33.6B

The Surface Transportation Board has said it would consider whether any deal would destabilize the industry and induce more mergers. The board adopted tough rules for major railroad mergers after service problems developed after railroad mergers in the 1990s.

Kansas City Southern said for each share of its common stock, shareholders will get $200 in cash and 1.129 shares of Canadian National common stock. Kansas City Southern shares were up slightly Friday morning, to $295.62 per share.

In a letter to regulators Friday, Canadian Pacific said that it intended to proceed with its application for its approval to control Kansas City Southern based on its agreement from March.

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