North America - Kansas City Southern (KCS) is preparing to take a key first step to opening takeover talks with Canadian National Railway Co. (CN), according to people familiar with the matter, as the battle for the U.S. railroad operator heats up.
 
KCS is expected to declare in the coming days that CN's US$30 billion proposal is likely to lead to an offer that's superior to the deal it reached last month with Canadian Pacific Railway Ltd. (CP), said the people, who asked to not be identified because the matter is private.
 
The move would allow it to start talks with the interloper.
 
It's open to discussions with CN because the new offer presents a higher value to shareholders than its US$25 billion cash-and-stock deal with CP, the people said.
 
KCS likes that CN has only asked for two weeks to finalize its plans and feels that both offers carry similar risks for investors, the people said.
 
Starting discussions with CN wouldn't cancel the existing agreement with CP, and KCS will still need to determine whether the new offer is superior.
 
If it does, CP would then have the opportunity to counter bid, the people said.
 
While KCS views the CN proposal as having more antitrust risks, it doesn't see them as insurmountable, the people said.
 
KCS has yet to make a final decision and may still choose not to proceed with the talks, the people said.
 
"We remain confident that the value and certainty provided by CN's proposal for KCS makes it a clearly superior transaction that is in the public interest and has a clear path to completion. We would welcome the opportunity to engage with the board of KCS," CN said in a statement.
 
Representatives for KCS and CP declined to comment.
 
Bidding War
 
After CN's unsolicited cash-and-stock offer this week, Canada's two biggest railroads are battling to win the company, which links their country with the U.S. and Mexico, and takes advantage of a reworked North American trade alliance.
 
Another factor contributing to KCS's openness to engage with CN is that both bids are similar in how they mitigate an important risk to the U.S. railroad's investors.
 
Both ensure that shareholders would still get paid even if regulators nix the deal.
 
Investors would receive cash and shares when KCS is placed into a voting trust, or holding company essentially, ahead of the outcome of the regulatory review, according to shareholder materials.
 
The regulatory concerns have been underscored by the barbs the Canadian railways have been trading this week.
 
CP Chief Executive Officer Keith Creel called CN's takeover bid "fool's gold" on Wednesday, saying it has little chance of U.S. regulatory approval.
 
CN countered Thursday, accusing CP of trying to distract investors with "inaccurate and unfounded assertions."
 
In a letter to KCS CEO Pat Ottensmeyer, it said CP was trying to advance its own interests and deprive investors of the full value of their shares.
 
Scott Deveau and Kiel Porter.