(Reuters) — Canadian National Railway said today it would not proceed with its $29.6 billion offer for Kansas City Southern, citing regulatory hurdles and paving the way for the U.S. railroad to be bought by rival Canadian Pacific Railway.
"There have been significant changes to the U.S. regulatory landscape since CN launched its initial proposal which have made completing any Class I merger much less certain," the company said.
Separately, Kansas City Southern said it would enter into a merger agreement with CP because it found the bid to be superior.
CN had come under pressure from investors, including hedge fund TCI, to abandon its pursuit because the proposed deal became fraught with risk after the U.S. Surface Transportation Board shot down a proposed voting trust structure.
CN had informed Kansas City Southern it was unlikely to make a new offer ahead of a Friday deadline to beat Cap's offer, Reuters reported on Tuesday, citing a person familiar with the matter.
It is now entitled to a $700 million break-up fee from the U.S. railroad, in addition to the $700 million it paid Kansas City Southern to pass on to CP as a break-up fee for terminating their March deal.
CP has said it will cover both payments.
TIMELINE: the unfolding of the Kansas City Southern takeover saga
Kansas City Southern announced earlier this week it planned to accept Canadian Pacific Railway's US$27.2 billion cash-and-stock acquisition offer as superior to a $29.6 billion deal to sell itself to Canadian National Railway.
The decision comes after the United States Surface Transportation Board (STB) rejected a temporary "voting trust" structure last month that would have allowed Kansas City Southern shareholders to receive the $325-per-share cash-and-stock consideration under the deal with CN without having to wait for full regulatory approval.
Below are the events that unfolded over several months as CN and CP locked horns to take control of Kansas City Southern to create the first railway spanning the United States, Mexico and Canada, as they stand to benefit from a pick-up in trade.
MARCH 21: CP agreed to acquire Kansas City Southern in a $25 billion cash-and-stock deal, which would be the largest ever combination of North American railways by transaction value.
MARCH 22: Farm groups said CP's deal to buy Kansas City Southern would create a rail network from Canada to Mexico that could smooth the flow of their goods to market.
APRIL 20: CN offered to buy Kansas City for about $33.7 billion, trumping CP's buyout offer for the railroad operator. CN said it was willing to match the terms of CP's offer for Kansas City Southern.
APRIL 21: CN informed the Surface Transportation Board (STB), which oversees freight rail service and rates in the U.S., that it planned to file an application, seeking permission to combine with Kansas City Southern.
APRIL 21: CP's chief executive officer Keith Creel said the company would not raise its bid for Kansas City Southern and that bigger rival CN's offer is "not a real deal." Creel said the company was not ready to put its "balance sheet at risk."
APRIL 22: CN informed Kansas City Southern's board about its confidence in winning regulatory approvals for its offer.
APRIL 24: The STB granted a waiver to CP's bid for Kansas City Southern, which means the deal would not be subjected to the tougher railroad merger rules the regulator put in place in 2001. At the same time, Kansas City Southern said its board had determined that a competing offer from CN could be expected to lead to a "superior proposal."
APRIL 26: North America's freight rail customers, from grain shippers to logistics companies, chose sides as the takeover war continued. CN filed 409 letters of support with the STB, almost at par with CP's stated level of support. Some companies like Coca-Cola and Conagra publicly supported both rail bids.
MAY 1: CP filed a formal objection stating CN's rival bid for Kansas City does not qualify to be exempt from tougher merger rules as the CN-KCS deal would greatly expand the size of the fifth largest U.S. Class 1 railroad.
MAY 6: The STB approved the voting trust for CP's proposed acquisition of Kansas City. CP had earlier agreed to bear most of the risk of the merger deal not going through. CP was going to buy Kansas City shares and place them in an independent voting trust, insulating the acquisition target from its control until the STB cleared the deal.
MAY 13: Kansas City Southern accepted CN's bid, leaving CP with five business days to make a new offer. If CP were to table a new offer, a bidding war could ensue.
MAY 14: The U.S. Department of Justice said CN's bid for Kansas City Southern appears to pose greater risks to competition than an agreement with CP.
MAY 18: Billionaire hedge fund manager Chris Hohn urged CN to abandon its bid for Kansas City Southern unless the Canadian railroad operator changed its agreement to drop a key feature that could invite more regulatory scrutiny.
MAY 20: CP asked the U.S. railroad operator to reject rival CN's takeover offer, saying there was no longer any basis to terminate the CP-KCS agreement. MAY 21: Kansas City Southern reiterated that CN's offer was "superior".
MAY 26: CN agreed to divest Kansas City Southern's 70-mile rail line between New Orleans and Baton Rouge to eliminate the only overlap between the two railroad operators.
AUG. 10: CP presented a new $27 billion offer for U.S. peer Kansas City Southern.
AUG. 12: Kansas City Southern's board determined that the unsolicited proposal received from CP does not constitute a "superior proposal" to its agreement with CN.
AUG. 12: Kansas City Southern said it would delay a shareholder vote on its deal to sell itself to CN if the STB has not delivered its decision by Aug. 17.
AUG. 31: STB rejected CN's voting trust structure that would have allowed the railroad to proceed with its $29 billion proposed acquisition of Kansas City Southern.
SEPT. 1: Kansas City Southern adjourned a shareholders meeting that was set to vote on its deal with CN. Kansas City Southern said it was working with CN to evaluate the options available and would re-evaluate CP's offer.
SEPT. 1: CP chief executive officer said the company would not be as willing to offer Kansas City $300 per share should the U.S. railroad operator's board fail to decide on the offer by its Sept. 12 deadline.
SEPT. 4: Kansas City Southern said it will initiate talks with CP because CP's unsolicited proposal to acquire it could reasonably be expected to lead to a better proposal than one made by CN.
SEPT. 7: Billionaire Chris Hohn's TCI Fund Management said it intends to nominate directors to replace about half of CN's board, after its costly attempts to buy Kansas City Southern were dealt a blow by the U.S. regulator.
SEPT. 12: Kansas City Southern said it planned to accept CP's $27.2 billion cash-and-stock acquisition offer as superior to its $29.6 billion deal to sell itself to CN.
SEPT. 15: CN says it will not proceed with its attempt to buy Kansas City Southern.