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Keith Creel, chief executive officer of Canadian Pacific Railway Ltd., refused to raise his bid for Kansas City Southern, and instead appealed to the board of the U.S. railway to reject a higher offer from rival Canadian National Railway Co. on the grounds the U.S. regulator is unlikely to approve it.

CN outbid CP in the fight for KCS, offering US$29.8-billion or US$325 a share for the U.S. carrier. CP had offered US$25.2-billion or US$275 a share.

Mr. Creel on Thursday described CN’s higher offer as shocking and called the Montreal rival an “interloper” that “weaponized” its balance sheet to outbid his railway. He reiterated CP will not engage in a bidding war that would saddle the railway with too much debt.

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“We feel it would be destructive to our mutual interests to engage in a bidding war in reaction to CN’s illusory offer, particularly where our existing CP-KCS merger agreement provides KCS’s shareholders with a significant premium,” Mr. Creel said in an open letter to KCS.

“Value not achievable is value not believable,” Mr. Creel said at an investors’ conference on Thursday morning, speaking hours before the 5 p.m. ET deadline Thursday for the company’s response to the higher CN bid.

Takeover battle will force railways to scrap their old route maps

Mr. Creel said CP’s lack of overlap with KCS – their tracks meet in Missouri – means the deal is more likely to receive U.S. regulatory approval. CN has a much larger network, and has said it will address any anti-competitive issues the regulator raises in its review, which is expected to last into late 2022 at the earliest.

Christian Wetherbee, an analyst at Citigroup in New York, said he was surprised CP did not raise its bid. The railway is “doubling down on its regulatory argument, which sits on stronger footing,” Mr. Wetherbee said.

“The ball is now in KCS’s court,” Mr. Wetherbee said. “KCS must now weigh the upside of CN’s deal against the potential for the deal to fall apart, leaving it with US$1-billion in break fees and a potentially lower follow-up offer from CP” if the U.S. regulator rejects CN’s plan to hold KCS in a voting trust pending approval of the takeover.

“Ultimately, we see a higher likelihood that KCS takes the CN deal and the regulatory risk,” Mr. Wetherbee said.

KCS did not immediately respond to a request for comment.

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KCS employs 6,500 people and has an 11,400-kilometre network that extends from the U.S. Midwest into Mexico. The railway is sought by both Canadian railways for its links to sea and river ports in the U.S. and Mexico, and its network that would allow the carriers to offer customers single-line train service that would compete better with trucks.

A KCS takeover would be first major rail deal to come before the U.S. Surface Transportation Board in 21 years.

In his letter, Mr. Creel also highlighted a Monday statement from the STB, signalling it would subject CN’s voting trust application to a strict review. The “use of a voting trust is a privilege not a right,” the STB said. The regulator also questioned the amount of debt CN would amass in the deal, citing the financial risks to CN and the U.S. rail network should the takeover be rejected and CN be forced to sell KCS at a discount to a third party.

Voting trusts are a feature of U.S. railway takeovers intended to preserve the target’s independence and operating integrity during the regulatory approval process. CP’s proposed voting trust has already received STB approval. On the CP-KCS takeover itself, the STB said in a preliminary ruling in April the proposal raises few anti-competitive issues, given the combined companies would be the smallest of the large seven carriers in the United States.

The CN-KCS deal and voting trust will be subject to tougher public interest and competition standards, the STB said.

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