Kansas City Southern agreed to a US$30 billion merger with Canadian National Railway Co., scrapping a US$25 billion deal with Canadian Pacific Railway Ltd. after it declined to boost its offer.

Under the deal, Canadian National will pay US$200 and 1.129 shares of its stock for each share of Kansas City Southern, the U.S. railroad said in a statement Friday. Kansas City Southern paid a US$700 million breakup fee to Canadian Pacific, which will be reimbursed by Canadian National.

Kansas City Southern last week deemed Canadian National’s bid superior and gave Canadian Pacific until the end of this week to sweeten its offer. Instead, Canadian Pacific said it wouldn’t enter a bidding war. It urged Kansas City Southern to drop its larger rival’s proposal because of heightened risk that the deal couldn’t win approval from U.S. regulators, which is still a looming question mark for Canadian National.

The ultimate outcome will determine which gets to be the first railroad to operate from Canada, down through the U.S. and on to Mexico. Kansas City Southern gets about half its revenue from Mexico, which is poised to capture investment as manufacturers seek to use a renegotiated trilateral trade agreement to shorten overseas supply lines.

“I am confident that together with KCS’s experienced and talented team, we will meaningfully connect the continent,” Canadian National Chief Executive Officer Jean-Jacques Ruest said in the statement.

Kansas City Southern was little changed at US$294.52 at 1:11 p.m. in New York. The railroad’s shares had advanced 44 per cent this year through Thursday. Canadian National declined 1.6 per cent to $126.23 in Toronto, while Canadian Pacific rose 1.5 per cent to $98.63.

Now that Kansas City Southern has spurned Canadian Pacific, the focus shifts to the U.S. Surface Transportation Board, which will decide whether Canadian National can use a voting trust to complete the financial portion of the transaction. Closing the deal is contingent on getting such approval.

The trust would allow Kansas City Southern stockholders to get paid for their shares while government approval to merge operations is pending -- a process that could take more than a year. The STB, which has final say on U.S. railroad mergers, has approved Canadian Pacific’s trust but hasn’t made a final decision on Canadian National’s.

Canadian National’s proposal is “illusory,” Canadian Pacific CEO Keith Creel said in a Thursday letter to Kansas City Southern’s board, citing opposition from the U.S. Justice Department and a large shareholder. Creel also pointed to the STB’s decision to judge the Canadian National proposal under tougher antitrust standards.

Canadian National has said it’s confident that its proposal will get regulatory approval.

Kansas City Southern and Canadian Pacific had reached a merger agreement in March that Canadian National topped in April. The U.S. carrier earlier this month said it planned to accept Canadian National’s offer.

Creel early Thursday said he “remained confident” that the STB wouldn’t approve Canadian National’s proposal for a voting trust, pointing to language in a recent ruling in which the board said it expected “to take a more cautious approach.”

The STB has said it would ultimately judge Canadian National’s proposal under stricter merger rules than Canadian Pacific’s, explaining that the smaller railroad’s plan would “result in the fewest overlapping routes.” Canadian National has to prove that its deal would be in the public interest, while Canadian Pacific merely has to establish that its tie-up wouldn’t hurt competition.

Kansas City Southern is the smallest of the seven large U.S. and Canadian railroads and one of the industry’s few substantial merger targets remaining.