One of two Canadian railroads bidding for Kansas City Southern drops out.

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Canadian Pacific has emerged as the winner in a long-running battle to acquire Kansas City Southern, positioning it to become the first railroad operator whose network spans from Canada to Mexico.

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Its rival in the bidding, Canadian National, said on Wednesday that it had received notice from Kansas City Southern that it was terminating a merger agreement signed in May.

“The decision not to pursue our proposed merger with KCS is the right decision for CN as a responsible fiduciary of the interests of our shareholders,” Canadian National CEO Jean-Jacques Ruest said in a statement.

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At stake was probably the last major takeover of a major railroad; The merger has consolidated the industry into seven railways from over 100. The key component of the deal is access to Mexico, as railroads look to capitalize on trade flows into North America on the heels of the United States-Mexico-Canada Agreement, which was signed into law last year.

“The timing has never been more ideal relative to what’s happening in the market,” said Keith Creel, chief executive of Canadian Pacific. “With the USMCA, with the closeness it is going to have with many companies that are trying to stabilize their supply chains – this will become the backbone for this to happen.”

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Canadian Pacific first made its $29 billion bid for Kansas City Southern in March, following a $33.7 billion offer from Canadian National in April. But the Canadian National Deal faced a regulatory challenge last month. In response, Kansas City Southern said on Sunday that it had selected Canadian Pacific as a better suitor.

Canadian Pacific sweetened its cash-and-stock offering in August, valuing Kansas City at about $31 billion. The key was “to avoid a bidding war”, Mr Krell said. Canadian Pacific’s winning bid was higher than its original offer but still lower than Canadian National.

“I knew our best game was to keep our powder dry, wait for the right opportunity, and then offer our final best,” he said.

To fund its deal, Canadian Pacific raised the set price for Kansas City’s Southern shares and increased its debt financing from $8.6 billion to $9.5 billion.

Canadian Pacific was up more than 1 per cent on Wednesday, while Canadian National was up more than 3 per cent. Shares of Kansas City Southern were up less than 1 percent.

Canadian National pulled out as it wrestled with investors unhappy with its role in the takeover feud. TCI Fund Management, a longtime railroad investor that owns more than 5 percent of Canadian National, launched a proxy fight to oust Mr. Ruest in what it called a “reckless bid” for Kansas City Southern. Is.

TCI demanded that Canadian National stop pursuing the takeover and overhaul its board. It is also the largest shareholder of Canadian Pacific with an 8 percent stake.

Kansas City will pay Southern Canadian National $700 million in breakup fees, as well as refund another $700 million that Canadian National paid to terminate the original railroad deal with Canadian Pacific.

The turning point in the deal was a decision by the Surface Transportation Board, the regulator overseeing rail deals, which unanimously decided against the use of companies’ voting trusts, a common but controversial structure in such deals.

The ruling was the first real test of the guidelines to increase competition in 2001. Deals involving the largest railroads. Canadian Pacific, which has a proposed voting trust that has not been blocked by regulators, successfully argued for its deal with Kansas City Southern to be evaluated outside those guidelines, given its small size.

Still, it was preceded by President Biden’s executive order in July aimed at anti-competitive maneuvers in the railroad industry and a host of others. The Surface Transportation Board must approve the Kansas City Southern and Canadian Pacific deal with this new investigation still in the background. Regulators and shareholders in Mexico must also approve it.

The executive order “convinced me more strongly about our ability to approve this deal,” said Mr. Crell, who praised the deal’s ability to get trucks off the road at a time when the Biden administration focusing on carbon emissions. He said the deal is the only combination of the largest railroads with no overlap.

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