Canadian Pacific’s acquisition of KCS railroad back on track

After initially getting derailed this spring, Canadian Pacific’s $31 billion acquisition of Kansas City Southern railroad is back on track to move forward after Canadian National dropped out of the bidding war Wednesday.

The deal could still face tough scrutiny from regulators at the federal Surface Transportation Board, which hasn’t approved any major railroad mergers since the 1990s, but KCS shareholders will be set to get paid once shareholders of both companies and Mexican regulators approve it regardless of what the STB ultimately decides.

The $31 billion deal includes 2.884 CP shares and $90 in cash for each shareholder and the assumption of roughly $3.8 billion in debt.

“We’re elated. We’re tickled to death,” CP President and Chief Executive Keith Creel said. “It has been a long journey. No dull moments obviously, but it came to a conclusion where we intended it to in the beginning and believed it ultimately would end up. And we think it’s in a very good place for Canadian Pacific as well as KCS and all the stakeholders that we serve. We’re excited about that and ready to get to work.”

Canadian Pacific triumphed in the bidding war even though it offered less than Canadian National’s $33.6 billion bid because federal regulators wouldn’t let CN set up a voting trust to acquire and hold Kansas City Southern during their prolonged review. Canadian National will receive $1.4 billion in breakup fees for its trouble in the deal that has gone back and forth since CP and KCS first announced their merger agreement in March. CP will reimburse KCS for those breakup fees under the terms of their deal.

Canadian National CEO JJ Ruest said his railroad will focus on “profitable growth and opportunities for excellence” in its operations. CN had faced pressure in recent weeks from a major investor to abandon the deal and focus on its own performance.

The London-based TCI fund, which owns about 5% of CN’s stock, has already announced plans to call a special meeting to nominate four new directors who would help choose a new CEO for the railroad. A TCI spokesman said Wednesday that the fund didn’t have any immediate comment on CN’s decision.