Canadian Pacific Railway Photo: Website of Canadian Pacific Railway

Canadian National Railway Co said on Wednesday it would not proceed with its $29.6 billion offer for Kansas City Southern, citing regulatory hurdles and paving the way for the US railroad to be bought by rival Canadian Pacific Railway Ltd.

"There have been significant changes to the US regulatory landscape since CN (Canadian National) launched its initial proposal which have made completing any Class I merger much less certain," Canadian National said.

Separately, Kansas City Southern said it would enter into a merger agreement with Canadian Pacific as it found the bid to be superior.

Canadian National had come under pressure from investors, including hedge fund TCI, to abandon its pursuit, as the proposed deal became fraught with risk after the US Surface Transportation Board shot down a proposed voting trust structure.

Billionaire hedge fund manager Chris Hohn in May also urged Canadian National Railway to abandon its $33.6 billion bid for Kansas City Southern.

Canadian National had informed Kansas City Southern it was unlikely to make a new offer ahead of a Friday deadline to beat Canadian Pacific Railway Ltd's offer, Reuters reported on Tuesday, citing a person familiar with the matter.

It is now entitled to $700 million break-up fee from the US railroad, in addition to the $700 million it paid Kansas City Southern to pass on to Canadian Pacific as a break-up fee for terminating their March deal.

Canadian Pacific had said it will cover both payments.

Canadian National in July reported a 12.1 percent rise in quarterly revenue, as Canada's biggest railroad operator shipped more petroleum, chemicals and intermodal freight.

Total revenue rose to C$3.598 billion ($2.84 billion) in the three months ended June 30 from C$3.21 billion a year earlier, when the pandemic hit freight volume.