There is no guarantee Kansas City Southern will terminate the Canadian Pacific deal, as it could still change course and stick with it.

Canadian Pacific was betting recent setbacks for Canadian National’s higher offer would make sweetening its deal unnecessary, but the expected development indicates Kansas City Southern views the gap between the two cash-and-stock bids as too substantial to ignore.

Based on Thursday’s closing prices, Canadian National’s bid was worth roughly $320 a share, while Canadian Pacific’s was at around $287. When the offers were unveiled, they were worth about $30 billion and $25 billion, respectively.

Canadian Pacific is now expected to wait and see if regulators ultimately reject a Canadian National deal, which would give it another opening. Preliminary approval Canadian Pacific already received from the U.S. Surface Transportation Board would survive the termination.

Kansas City Southern is the smallest of the major freight railroads in the U.S. It plays a big role in U.S.-Mexico trade, with a network stretching across both countries, which helps explain its desirability as an acquisition target. Of the two suitors, Canadian Pacific is smaller and has less overlap with Kansas City Southern, which could give it a leg up in winning antitrust approval.

Should Canadian National succeed in closing the deal, it would become a bigger rival to industry heavyweights including

Union Pacific Corp.

, with a network linking the U.S., Mexico and Canada.

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 sweetening 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.

Either deal would involve a two-step process. First, a voting trust would acquire Kansas City Southern shares and, assuming necessary approvals are received, the companies would then merge. Both the use of a trust and a merger itself need approval from the STB, which requires major railroad combinations to be in the public interest and enhance competition.

While the STB already approved a voting trust as part of Canadian Pacific’s deal, it said this week that it was denying Canadian National’s request for now, without prejudice, since no formal merger agreement had yet been filed. Language in that decision suggested that the board will be more cautious about granting a trust to Canadian National.

Should Kansas City Southern spurn Canadian Pacific in favor of Canadian National, Canadian National would be expected to refile its request with the STB.

Canadian Pacific on Thursday pointed to comments the Justice Department filed with the STB saying the Canadian National proposal raises competition concerns that should prohibit the company from using a trust. And on Tuesday, TCI Fund Management Ltd., which holds a roughly 3% Canadian National stake and more than 8% of Canadian Pacific, urged Canadian National to drop its bid to avoid the risk of the trust not being approved. Canadian National’s largest shareholder, Cascade Investments LLC, has said it supports the bid.

Canadian National said in a statement Thursday following Canadian Pacific’s decision that it is confident in its ability to obtain STB approval and close a deal.

Corrections & Amplifications
The Surface Transportation Board said this week that it was denying Canadian National’s request to use a trust for now since no formal merger agreement had yet been filed. An earlier version of this article said STB denied the request last week. (Corrected on May 20, 2021)

Write to Cara Lombardo at cara.lombardo@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com