Canadian National Railway is walking away from its dream of building a truly continental rail network, and thus ceding that opportunity to its arch rival. 

In a release Wednesday morning, CN Rail said the friendly deal it struck to acquire Kansas City Southern has been formally terminated. CN’s decision to throw in the towel cleared the way for CP Rail to prevail in a months-long takeover battle.

Kansas City Southern confirmed Wednesday morning that it has entered into a formal agreement to be acquired by CP for US$90 in cash and 2.884 of a CP share for each share held. That deal is subject to shareholder votes and other standard approvals, with Kansas City Southern shareholders expected to receive their proceeds from the takeover in the first quarter of next year.

However, CP said it doesn’t expect to take control of Kansas City Southern’s U.S. rail network until the second half of 2022, after getting the go-ahead from the U.S. Surface Transportation Board. Once that occurs, the combined entity will be renamed Canadian Pacific Kansas City, and will retain Calgary as its global headquarters, CP announced Wednesday.

“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership. … This perfect end-to-end combination creates the first U.S.-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options, and support North American economic growth,” said CP Rail President and Chief Executive Officer Keith Creel in a release.

In connection with the news, Kansas City Southern will pay CN a US$700-million break fee. It will also provide CN with US$700 million to cover the break fee that was previously paid to Canadian Pacific Railway when that company’s original deal to acquire Kansas City Southern was disrupted by CN. Kansas City Southern said the break fees that it’s providing to CN will be reimbursed by CP.

“We believe that the decision not to pursue our proposed merger with KCS any further is the right decision for CN as responsible fiduciaries of our shareholders’ interests. CN will continue to pursue profitable growth and opportunities for excellence as a leading Class I railroad, and we look forward to outlining more details on our strategic, operational and financial priorities in the near future,” said CN Rail Chief Executive Officer Jean-Jacques Ruest in a statement. 

The flurry of developments marks a return to the original plan.

It was CP that initially unveiled its plan for a network that would touch all three North American countries when it announced a friendly deal to acquire Kansas City Southern in March.

It was later muscled out of the way by CN after the Montreal-based railway wooed Kansas City Southern with a richer offer and triggered the takeover tug of war.

CN’s fortunes soured last month, however, when the U.S. Surface Transportation Board denied the company’s application for a voting trust that was crucial to the success of its takeover strategy.

Along the way, CN also incurred the wrath of one of its top shareholders. TCI Fund Management Ltd., which now holds a 5.2 per cent stake in the rail company, repeatedly decried CN’s efforts to acquire Kansas City Southern. On Monday, it formally put CN on notice that it intends to requisition a special meeting of shareholders to vote on its slate of four nominees to the board of directors, with an ultimate plan to remove Ruest as CN’s chief executive and replace him with industry veteran – and for CN Rail chief operating officer – Jim Vena.

“In the short term, [walking away from Kansas City Southern] is a positive for Canadian National stock because the company won’t be out there borrowing as much money,” said Norman Levine, managing director at Portfolio Management Corp., in an interview. “Equity won’t be diluted and earnings won’t be hurt in the short run.

“I would expect CP stock to underperform CN in the short term. But good for CP, I think for them in the long run it’s going to be a good deal.”

With files from BNN Bloomberg's Jon Mace