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The CN and CP offers both require approval of KCS shareholders, and the okay of regulators in Mexico and the United States.Jeff McIntosh/The Canadian Press

Canadian Pacific Railway Ltd. renewed the takeover battle for Kansas City Southern on Tuesday with a new bid that is cheaper than Canadian National Railway Co.’s but offers what the Calgary railway says is greater assurance its deal will win U.S. regulatory approval.

CP raised its cash-and-stock offer for KCS to US$27.2-billion, or US$300 a share, from US$25.2-billion, or US$275 a share, in an effort to persuade the U.S. carrier’s shareholders to reject CN’s takeover in an Aug. 19 vote. CP increased its share exchange ratio to 2.884 CP shares for each KCS share, but did not raise the cash component of US$90, and said it will assume US$3.8-billion in KCS debt.

For investors in Canadian Pacific and Canadian National, risks are rising

KCS agreed to a CP offer in March, but in May it accepted a deal from CN worth US$29.8-billion, or US$325 a share. CN’s offer is worth US$200 in cash and 1.126 shares of CN stock.

The CN and CP offers both require approval of KCS shareholders, and the okay of regulators in Mexico and the United States. The U.S. regulator, the Surface Transportation Board, must also approve a voting trust that will own and operate KCS during the lengthy approval process for a takeover itself.

The STB said on Tuesday it will issue its ruling on the CN voting trust by Aug. 31. CN said in a news release it is confident its voting trust will receive STB approval.

Voting trusts are a structure used in some U.S. takeovers that ensure the operational viability and independence of the target company during the regulatory review period, which can last more than a year.

The STB has already approved CP’s voting trust, which CP has said gives its bid greater certainty for KCS shareholders. And the regulator will review the CP deal using laxer standards for measuring the impact on competition than in the CN case, given CP’s smaller size and lack of overlap with KCS.

Still, Christian Wetherbee, a Citigroup analyst, said it will be difficult for KCS shareholders to reject CN’s higher offer, and CP faces an “uphill battle.” Shareholders see CP’s offer as a fallback in the case the regulator objects to CN’s trust, he said.

Cameron Doerksen, a National Bank analyst, said CP has given KCS shareholders “something to mull ahead of shareholder vote.”

“The decision for KCS shareholders now is to take the risk that the STB rejects the [CN] trust and then they may be forced to wait until 2022 for another offer to materialize at an acceptable price, or vote against the CN merger now and accept a modestly lower financial consideration, but with more certainty of a deal closing.”

The winner of the takeover battle will gain a rail network that extends from the U.S. Midwest into Mexico, reaching industrial, agricultural and marine hubs.

“This is a real offer, it’s a serious, it’s a certain offer and it’s a superior offer,” CP chief executive officer Keith Creel said on a conference call with analysts on Tuesday.

“CP has always believed that CN’s deal was not executable and an attempt to dismantle the unique, pro-competitive deal that CP and KCS had agreed upon,” CP said in a statement on Tuesday. “We remain confident that the Surface Transportation Board will ultimately reject CN’s proposal to use a voting trust and prove that the proposed CN merger is not a viable transaction.”

Konark Gupta, a Bank of Nova Scotia analyst, said although CP’s offer falls short of CN’s, it could draw some interest from KCS board members and investors.

“The key question for KCS investors would be whether they should trade … less value from CP for more certainty in receiving that value (CP’s voting trust is already approved) or assume greater risk by accepting CN’s higher-value offer before STB’s decision on the voting trust,” Mr. Gupta said in a research note.

In a letter to KCS’s board of directors on Tuesday, Mr. Creel said he is confident the STB will reject CN’s application for a voting trust. “We believe that our offer is superior to the proposed CN merger due to the greater regulatory and value certainty it provides KCS stockholders. CP has a clear path to closing with STB voting trust approval (a condition CN has still not been able to satisfy) already in-hand.”

CN has said its takeover will foster competition, and any antitrust concerns raised by the STB will be addressed.

“CN and KCS’s agreed transaction remains superior and the best option for both companies’ stakeholders to deliver on a combination that will enhance competition and provide new servicing options for customers,” CN said in its release.

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