Canadian National Railway (CN Rail) appears to have come from behind and taken the lead in the race with Canadian Pacific Railway (CP Rail) to merge with Kansas City Southern to form the first rail freight network to link Canada, the U.S., and Mexico.

CN announced Thursday that it has revised its offer to merge with Kansas City Southern (KCS), leading the board of directors for the Kansas City-based railway to deem CN’s proposal as superior to the merger agreement that KCS originally announced with CP Rail.

CP and KCS announced their $29 billion merger plan to create a railway spanning across Canada down to the U.S. Gulf, and across Mexico to several port cities on March 21. CN then announced an unsolicited offer that placed a higher value on KCS on April 20.

While CN’s latest offer stills values KCS at US$33.6 billion, CN announced Thursday that it has offered more shares to KCS shareholders, who would own a projected 12.6 per cent of the combined company. CN also said it would reimburse KCS for the US$700 million break-up fee that KCS now owes for backing out of its agreement with CP.

“After consultation with the company’s outside legal and financial advisors, the KCS board of directors determined that CN’s revised proposal constitutes a ‘Company Superior Proposal’ as defined in KCS’s merger agreement with Canadian Pacific Railway Limited,” says a statement from the KCS board of directors, issued on Thursday.

CP now has five business days to negotiate changes to its original merger agreement that would convince the KCS board to change its mind about CN’s offer being superior.

“As we’ve said repeatedly, we are not going to enter into a bidding war,” said CP Rail in a statement late Thursday.

From a regulatory standpoint, many believe CP’s offer would have an easier path to approval, as the CP and KCS rail networks meet in Kansas City, but do not overlap anywhere. CN and KCS, meanwhile, both operate in the New Orleans area. Farm groups in North Dakota have also advocated for the CP-KCS merger, saying it would introduce new competition for rail in their state.

“It is not surprising that CN would raise its offer, and it only highlights CN’s recognition of the significant regulatory risk/challenges associated with its anti-competitive bid,” said the statement from CP. “There is nothing new here; this doesn’t make it any more likely that the CN proposal can close into a voting trust.”

KCS has until 5pm on May 21 to formally accept CN’s offer, which would still be subject to approval by KCS shareholders, the approval of a voting trust transition process by the U.S. Surface Transportation Board, as well as other regulatory approvals.

Last week, CN announced it had placed an order for one thousand high-capacity grain hopper cars to be built in Mexico by TrinityRail.

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