By Dave Sebastian

Canadian Pacific Railway Ltd., in a letter to a U.S. federal agency, said Kansas City Southern has scrapped its combination agreement with the company in favor of a competing proposal from Canadian National Railway Co., a dramatic turn with big implications for the shape of the U.S. rail industry.

Kansas City Southern didn't immediately respond to a request for comment. The Wall Street Journal Thursday reported that Kansas City Southern was expected to ditch the agreement.

Canadian Pacific Friday said it remains ready to re-engage with Kansas City Southern. Canadian Pacific had earlier decided to hold firm on the terms of its already-agreed deal with Kansas City Southern.

Canadian Pacific said it will proceed with its application with the U.S. Surface Transportation Board seeking the board's authority to "control KCS and its U.S. rail carrier subsidiaries." The company has already received preliminary regulatory approval for the deal.

Canadian Pacific had agreed in March to pay what was then worth $275 a share--0.489 of its shares and $90 in cash. (The exchange ratio was set before Canadian Pacific's recent five-for-one stock split.)

Canadian National subsequently offered $325 a share, a proposal it later sweetened to comprise $200 in cash and 1.129 shares of its stock.

In increasing its proposal, Canadian National agreed to add more stock and cover the $700 million breakup fee Kansas City Southern would owe Canadian Pacific for walking away from their existing agreement. If an agreement with Canadian National ultimately fails to get approval from regulators, the Canadian company would also owe Kansas City Southern a $1 billion reverse breakup fee.

Write to Dave Sebastian at dave.sebastian@wsj.com

(END) Dow Jones Newswires

05-21-21 1015ET