By Greg Roumeliotis

(Reuters) -Canadian Pacific Railway Ltd inked a $27.2 billion cash-and-stock deal to buy Kansas City Southern (NYSE:) on Wednesday after Canadian National Railway (TSX:) Co conceded it could not save its own $29.6-billion deal for the U.S. railway.

With a network of approximately 20,000 miles, and an annual revenue of $8.7 million, this combination will be the first direct rail linking Canada, America, and Mexico. This is the conclusion of an intense bidding battle.

The $300 per share cash-and-stock deal that Canadian Pacific (NYSE:) clinched is higher than the $275 per share cash-and-stock deal that it had secured in March to buy Kansas City Southern. Canadian National lured Kansas City Southern with its $325 share cash-and stock offer in May.

In Wednesday’s New York trading, Kansas City Southern shares traded at $281.55.

Canadian National lost out to the U.S. The U.S. Surface Transportation Board (STB), which rejected the temporary “voting trust” structure, meant to allow Kansas City Southern shareholders consideration of the deal but not have to await full regulatory approval, made a serious blow to Canadian National.

Canadian Pacific’s proposed voting trust has been cleared by the STB. Kansas City Southern shareholders will still receive $300 per share in stock and cash, even if regulators reject the deal. This provided Kansas City Southern with regulatory certainty, which convinced the board to move to Canadian Pacific even though it offered a lower offer than Canadian National.

Canadian National was also under pressure by some investors including TCI Management Ltd. to drop its pursuit of Kansas City Southern. Canadian National stock rose 3.7% to C$150.97 on Wednesday as investors expressed their relief that the failed deal had been abandoned.

Because a new deal would have to be made in Kansas City Southern’s place for any regulatory risks associated with sticking to the Canadian National agreement. It would likely have required a much higher price and a regulation breakup fee than what Canadian National had offered.

STB stated last month that although the overlap between Kansas City Southern and Canadian National was limited to just 70 miles (113km) between Baton Rouge, Louisiana and New Orleans respectively, both railways ran parallel lines throughout the United States. They could also be subject to less competition if that voting trust was approved.

The company released a statement Wednesday saying that there have been “significant changes in the U.S. regulatory environment since Canadian National’s initial proposal.”

Canadian National does have a silver lining. Canadian National is entitled to a $700m breakup fee from Kansas City Southern and the $700m it paid Canadian Pacific for their March termination fee. Canadian Pacific stated that it would cover both of these payments.

CANADIAN PACIFIC NOT IN THE CLEAR YET

There are still potential pitfalls for Canadian Pacific. Canadian Pacific needs to have a majority vote of investors in support of the Kansas City Southern agreement. While there has been no opposition from major shareholders, Canadian Pacific is not as strong as Canadian National.

Even though it approved it, it is possible for the STB to reject Canadian Pacific’s Kansas City Southern agreement. People familiar with the situation said that it is more likely for the STB, which would require Canadian Pacific to make concessions, including a limited divestment or commitments about how much it charges customers to clear the deal. Canadian Pacific could lose its profitability if some concessions are not made.

STB didn’t immediately reply to our request for comment.

Canadian Pacific’s voting trustee would need to sell Kansas City Southern if the STB disapproves of the deal. Canadian National could attempt to acquire it. Private equity firms have also been interested in acquisitions of the U.S. railroad.