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A freight train of the Kansas City Southern Railway Company is pictured in Toluca, Mexico, on Oct. 1, 2018.

Edgard Garrido/Reuters

Kansas City Southern switched suitors late Thursday, endorsing a US$30-billion offer from Canadian National Railway Co. and spurning a US$25.2-billion bid from rival Canadian Pacific Railway Ltd.

KCS, which operates a network that links the U.S. Southwest to Mexico, said its board and advisers found Montreal-based CN Rail’s offer of US$200 a share in cash and 1.129 common shares to be a “superior proposal” to the friendly bid of US$90 in cash and 0.489 of a share that CP Rail announced in March.

On Thursday, CN Rail also raised its offer by agreeing to pay a US$700-million break fee that KCS will owe to CP Rail if their transaction fails to close.

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“We are delighted that KCS has deemed CN’s binding proposal superior,” Jean-Jacques Ruest, president and chief executive officer of CN Rail, said in a release. He said the KCS board’s endorsement recognized “the many compelling benefits of our combination and expressing confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction.”

CN Rail chair Robert Pace added: “We are the better bid, better partner, better railway and best solution for KCS, and are pleased that the KCS board of directors has recognized the superiority of our proposal.”

KCS said Calgary-based CP Rail now has five business days to improve its pitch with an offer the U.S. railway’s board deems superior to what’s currently on the table. To date, CP Rail CEO Keith Creel has said his company’s bid had less regulatory risk than its rival’s offer, and declined to raise the stakes.

Late Thursday, CP Rail said in a press release: “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.”

CP Rail said it would respond to KCS within the next five days. The company said: “As we’ve said repeatedly, we are not going to enter into a bidding war. Our mutually negotiated agreement with KCS represents compelling short-term and long-term value for shareholders that is actually achievable.”

The stakes are high in the battle for KCS, as a merged railway would forge the only network that connects Mexico’s manufacturers, farmers and energy producers to U.S. and Canadian markets.

The losing bidder, on the other hand, will be left at a significant competitive disadvantage. The Canadian railway that misses out will be far smaller than its North American rivals. The takeover bid would be the first to be considered by the U.S. Surface Transportation Board, or STB, between major North American railways since 1999, when it approved CN’s offer for Illinois Central.

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CN Rail’s offer is also subject to approval by the stockholders of KCS and receipt of other regulatory approvals in addition to the STB. The transaction is not expected to close until next year.

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