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Kansas City Southern terminates merger deal with CP, opting for CN's 'superior proposal'

·3 min read

Kansas City Southern (KSU) has terminated its merger agreement with Canadian Pacific (CP.TO), accepting a takeover offer from Canadian National (CNR.TO) in the hopes of creating a railway that spans Canada, the United States and Mexico. 

KCS said Friday that its board has determined CN's cash-and-stock bid valued at US$33.6 billion is a "superior proposal" and that it has formally entered a merger agreement with the railway. As a result, KCS has terminated the merger agreement it reached with CP in March and will pay the Calgary-based railway a breakup fee of US$700 million. The fee will be reimbursed to KCS by CN. 

The merger now faces several regulatory approvals, including from the U.S. Surface Transportation Board (STB). 

CN and CP had been locked in a battle over which railway would take over KCS. At stake is the creation of the first railway in North America that will connect Canada, the U.S. and Mexico, as well as capitalize on the USMCA trade deal. 

CN chief executive Jean-Jacques Ruest says the merger will "create the premier railway for the 21st century." 

"I am confident that together with KCS' experienced and talented team, we will meaningfully connect the continent – enhancing competition, offering more choice for customers, and driving environmental stewardship and shareholder value," Ruest said in a statement. 

CP, which initially proposed to merge with KCS with a bid valued at US$25.2 billion, declined to enter into a bidding war with CN. Keith Creel, CP's chief executive, said in a letter to KCS's board this week that CN's offer is "illusory" and he expects the STB will reject the proposal as it "would not be in the public interest."

CP said Friday it will continue to proceed with its application seeking authority to control KCS, in the event the CN deal fails to obtain regulatory approvals. 

"CP believes that CN cannot demonstrate that its proposed use of a voting trust would be 'consistent with the public interest'," CP's attorney David L. Meyer wrote in the letter to the STB. 

"CP believes that pursuing its application is in the best interests of both KCS and the public so that the pro-competitive CP-KCS transaction can proceed to be reviewed by the board and – in the event KCS's agreement with CN is terminated or CN is otherwise unable to acquire control of KCS – a potential acquisition of KCS by CP could be implemented without undue delay." 

Earlier this week, Ruest said the company is confident it will be able to overcome regulatory hurdles for its proposed merger with KCS. The company was dealt a blow this week after the STB issued a decision that said the deal will be judged under stricter rules due to concerns about competition. Ruest reiterated that the company remains 'confident' in the deal, despite the increased regulatory hurdles.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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