Kansas City Southern says it will talk with rival bidder CN; CP welcomes regulatory ruling

2/2 © Reuters. The Canadian Pacific railyard is pictured in Port Coquitlam 2/2

By Juby Babu and Kanishka Singh

(Reuters) -Canadian Pacific Railway on Saturday welcomed a favorable regulatory decision related to its proposed merger with Kansas City Southern (NYSE:KSU), on the same day that Kansas City said its board has determined that a competing offer from Canadian National Railway could be expected to lead to a "superior proposal."

Kansas City Southern said the board made its determination unanimously and said it would open negotiations with Canadian National, although it remains "bound by the terms of the CP merger agreement." It noted that its board "has not determined" that the CN proposal "in fact constitutes a Company Superior Proposal."

Canadian Pacific (NYSE:CP)'s $25 billion cash-and-stock offer, at the time the deal was announced in March, values Kansas City Southern at $275 per share.

Canadian National's rival cash-and-stock offer, made earlier this week, values Kansas City Southern at $325 a share.

Canadian Pacific on Saturday touted a ruling by the U.S. Surface Transportation Board, which oversees freight rail, that a waiver of stricter rules governing mergers granted to Kansas City Southern in 2001 would be applicable to a merger of Kansas City and Canadian Pacific.

The pre-2001 rule judges a proposed merger on whether it would adversely affect competition. Under the rule introduced in 2001, rail merger applicants must demonstrate that a proposed tie-up would be in the public interest. Kansas City Southern had been granted the waiver based on its small size.

The STB on Friday confirmed that the waiver it granted to Kansas City Southern in 2001 is applicable to the proposed friendly combination of the two companies.

Both companies expect the STB's review to be completed by the middle of 2022.

According to the regulator, the merger would result in the smallest Class I railroad, based on U.S. operating revenues and also result in few overlapping routes.

Following Canadian National's rival $33.7 billion offer for Kansas City Southern on Tuesday, CP said it would not raise its bid.

Canadian National Railway said in a statement on Saturday that it looked forward to engaging with Kansas City to finalize a merger agreement and that it welcomed the determination by Kansas City Southern's board.

Canadian Pacific, in a response, said the Kansas City Southern board was simply meeting its obligations under the merger agreement with CP and fulfilling its "fiduciary duty" to its shareholders by assessing the Canadian National offer.