Kansas City Southern in talks on Canadian Pacific's $31B bid

In this March 29, 2018 file photo, a Canadian National Rail locomotive moves through the rail yard in Dartmouth, Nova Scotia. Kansas City Southern is in talks with Canadian Pacific, Saturday, Sept. 4, 2021, to determine whether its $31 billion bid is the best offer on the table after regulators rejected a key part of Canadian National’s $33.6 billion offer last week. (Andrew Vaughan/The Canadian Press via AP)

In this Nov. 5, 2004, file photo, the logo of Kansas City Southern is down on a restored 1954 Kansas City Southern passenger locomotive at Union Station in Kansas City, Mo. Kansas City Southern railroad is trying to keep its $33.6 billion merger with Canadian National on track by rejecting a competing $31 billion bid from rival Canadian Pacific earlier this week. Kansas City Southern said Thursday, Aug. 12, 2021, that its board unanimously decided to continue backing Canadian National's higher offer. .(Norman Ng/The Kansas City Star via AP, File)

In this May 23, 2012, file photo, surveyors work next to Canadian Pacific Rail trains which are parked on the train tracks in Toronto. A planned shareholder vote on Canadian National's $33.6 billion offer has been delayed, Wednesday, Sept. 1, 2021, after regulators rejected a key part of the plan, so now Kansas City Southern can consider all of its options, including a competing $31 billion offer from Canadian Pacific Railway. (Nathan Denette/The Canadian Press via AP, File)

In this May 13, 2021, file photo, a man walks into Central Station next to Canadian National headquarters in Montreal. Canadian National’s $33.6 billion deal to acquire Kansas City Southern railroad is in jeopardy after federal regulators rejected a key part of the plan Tuesday, Aug. 31, 2021 and opened the door for a competing $31 billion offer from Canadian Pacific railroad. (Graham Hughes/The Canadian Press via AP, File)

OMAHA, Neb. (AP) — Kansas City Southern is in talks with Canadian Pacific to determine whether its $31 billion bid for the railroad is the best offer on the table after regulators rejected a key part of Canadian National's $33.6 billion bid last week.

Kansas City Southern said Saturday that its board believes CP's lower offer could be the better deal. That would be because the Surface Transportation Board said Canadian National won't be able to use a voting trust to acquire Kansas City Southern and then hold the railroad during the board's lengthy review of the overall deal.

In contrast, regulators have already approved Canadian Pacific's use of a voting trust because there are fewer competitive concerns about combining Canadian Pacific and Kansas City Southern. So there is a clearer path forward for the CP-KCS deal, although it would still face a detailed review from the Surface Transportation Board. It would be the first major railroad merger since the 1990s.

Canadian Pacific and Kanas City Southern have all week to work out their differences, but CP has put a Sept. 12 deadline on its latest offer, so it's not yet clear whether the two railroads will be able to rebuild the merger offer they first announced in March before Canadian National intervened. Both Canadian bids for Kansas City Southern include a mix of cash and stock and the assumption of about $3.8 billion in KCS debt.

And it's not yet clear whether Canadian National has any appetite to increase its bid because it is facing pressure from a major shareholder to abandon the Kansas City Southern deal. The London-based investment firm TCI Fund — which owns about 5% of CN's stock — maintains that CN should overhaul its board, get a new CEO and refocus its efforts on improving its own operations.

“We believe CN’s best days are ahead of it, provided the company immediately withdraws from its reckless, irresponsible, and value destructive pursuit of KCS,” said TCI Founder and Portfolio Manager Chris Hohn. The firm said Tuesday that it plans to call for a special CN shareholder meeting and nominate as many as five new directors to the board.

For more than two decades the railroad industry has been stable, with two railroads in the Western United States — BNSF and Union Pacific — two in the Eastern United States — CSX and Norfolk Southern — and the two Canadian railroads that serve part of the United States. Regulators have said that any merger involving two of the largest railroads generally needs to enhance competition and service the public interest to get approved.