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Canadian National now has five business days to improve its already accepted offer to avoid termination of the deal

Kansas City Southern KSU -1.25% said a recent takeover offer from Canadian Pacific Railway Ltd. CP -1.24% is superior to one it already accepted from Canadian National Railway Co. CNI -0.91% in the latest twist in a hotly contested battle for the railroad.

As set out in the terms of its existing agreement with Kansas City Southern, Canadian National now has five business days to improve its offer to avoid termination of the deal. It could also choose to walk away—and receive a $700 million breakup fee and reimbursement for a similar fee it previously covered.

Canadian Pacific, which had given Kansas City Southern until today to make a determination, said in a statement Sunday that it stands ready to complete a deal. Canadian National said in a statement that it is evaluating all of its options.

Should Canadian Pacific ultimately prevail, it would reunite two companies that first agreed to a $25 billion tie-up in March, before Canadian National swooped in with a roughly $30 billion topping bid.

In a deal with Canadian Pacific, Kansas City Southern shareholders would receive 2.884 Canadian Pacific shares and $90 in cash for each of their shares, now worth about $288 a share or $26 billion. Under the current deal with Canadian National, Kansas City Southern shareholders would receive 1.129 Canadian National shares and $200 in cash, worth about $334 a share.

Canadian National’s bid suffered a major setback on Aug. 31, when the Surface Transportation Board, a five-member panel that must bless mergers of freight railroads, ruled that the company wouldn’t be permitted to complete a deal using a temporary voting trust that was a crucial part of the offer.

The STB ruled that Canadian National hadn’t demonstrated that its use of a voting trust would be consistent with the public interest. Canadian National said last week that it is disappointed in the STB’s ruling and is evaluating its options. It said it remains confident that its proposal is in the public interest.

The STB decision had been eagerly awaited by the companies and investors. It prompted Kansas City Southern to evaluate an offer it had received earlier this month from Canadian Pacific, which had received the go-ahead for a similar trust months ago.

As Canadian National determines its next move, it also has an increasingly vocal shareholder to contend with: London-based hedge fund TCI Fund Management Ltd., which owns a roughly 5% stake, has urged the railway operator to abandon the deal and replace its CEO. TCI also owns a roughly 8% stake in Canadian Pacific and favors a deal between that railroad and Kansas City Southern.

Optimism tempered by concern over global supply chain problems and Delta variant

Europe’s economy is roaring back from the coronavirus crisis. Growth in the euro area outpaced both the US and China in the last quarter, more than 70 per cent of EU adults have been fully vaccinated against Covid-19, investment is booming and unemployment is falling.

However, European Central Bank president Christine Lagarde sounded a cautious note last week, saying “we are not out of the woods” and highlighting a number of risks over the coming months, despite raising its growth forecasts for the third consecutive time this year.

Economists say the European economy is in the “sweet spot” of its bounceback from the record postwar recession caused by the pandemic last year. But they warn the region looks set to follow the pattern seen in the US and China, which recovered faster from the Covid-19 crisis only for their rebounds to lose momentum more recently.

“We will get a good third-quarter growth number for the eurozone, but the winter brings the risk of a slowdown,” said Erik Nielsen, chief economist at UniCredit. “Our leading indicator is nosediving into the end of the year, so there are warning signs this recovery may not be as smooth as people think.”

The biggest warning sign is coming from bottlenecks in the global supply chain that have left manufacturers grappling with shortages and soaring prices of everything from semiconductors and paper to steel and plastics.

Executives at carmakers lined up at last week’s IAA Mobility conference in Munich to warn that there was no end in sight for the chip shortage that has forced them to shut production lines and left their output 30 per cent below pre-pandemic levels. “I believe the third quarter will be the trough, and then we will start moving back up again in the fourth quarter,” said Ola Kallenius, Daimler’s chief executive.

“The supply side issues are definitely a problem,” said Gilles Moec, chief economist at Axa. “Just look at the gap between orders and output at German carmakers, it is massive, and a good chunk of demand is not being filled so we are missing some output.”

Moec added that supply chain problems could hit consumer spending if they fuelled higher eurozone inflation, which already rose to a decade-long high of 3 per cent in August and is expected to keep rising for several more months. “We are starting to see that affect consumers in the US and it could happen here in Europe too,” he said. 

The second risk for Europe’s recovery is if the Delta variant or another strain causes a further damaging wave of Covid-19 infections, despite rising vaccination levels.

“The spread of the Delta variant has so far not required lockdown measures to be reimposed,” Lagarde said. “But it could slow the recovery in global trade and the full reopening of the economy.”

The number of coronavirus patients in intensive care in Germany doubled in the past fortnight, though it is still well below previous peaks. In France, the Pasteur Institute warned last week that lifting all remaining restrictions would “lead to significant stress on the health system”, with more than 5,000 hospitalisations a day — more than at the peak of the virus last year.

A further risk for the export-focused eurozone economy is that the recent slowdowns in the US and China could weigh on growth in the bloc.

Despite these clouds on the horizon, there is widespread optimism that the worst of the Covid-19 crisis in Europe is over and the region is set for a couple of years of strong growth, which the ECB said would reach 5 per cent this year and 4.6 per cent in 2022.

Daniela Ordonez, an economist at Oxford Economics, said Europe had reached “a turning point” in its rebound from the coronavirus crisis, adding: “Discussions about the post-pandemic era are starting to dominate as the economic recovery is now in full swing.”

The EU’s statistics agency upgraded its second-quarter growth figure for the eurozone to 2.2 per cent last week, saying most of this came from a 3.7 per cent jump in household expenditure. Government spending and business investment were also higher, while a rundown of inventories was the only slight drag.

“In terms of momentum, we are in a sweet spot because growth will remain strong by European standards even next year,” said Silvia Ardagna, chief European economist at Barclays. “Some sectors have still not caught up with pre-pandemic levels yet, there are a lot of excess savings to be spent and the labour market is improving faster than expected.”

Unemployment in the euro area has fallen from a high of 8.5 per cent after the pandemic hit last year to 7.6 per cent in July, even if there are still about 900,000 more people out of work than before the crisis and many more relying on furlough schemes for income. Meanwhile, southern European countries have benefited from a stronger rebound in tourism than was expected over the summer.

Most economists expect European governments to maintain their supportive fiscal policy into next year — particularly as both Germany and France are preparing for elections. A further boost will come from the EU’s €800bn Next Generation recovery fund, which is starting to flow into national coffers.

Lagarde said euro area gross domestic product was on track to regain its pre-pandemic level by the end of the year — a milestone the US and China have already hit but the UK is unlikely to reach until next year.

However, Nielsen at UniCredit said the real test for the eurozone was how quickly it would close its output gap by returning to the level it was expected to have achieved before the crisis hit, which he said was unlikely until 2023. “Things could plateau at this level long before we get back to the pre-pandemic trend line,” he warned.

As vehicles become more digital, the two industries talk about the benefits of cooperation: ‘We need you, and you need us.’

Cooperation between semiconductor companies and the automotive industry is moving into the fast lane, driven by a chip shortage and a recognition that cars are becoming ever-more digital.

More than a year into the crisis, executives from car and chip makers are establishing closer ties to address the shortage and working together to introduce new products. The shift was on display as executives from such chip companies as Intel Corp. INTC 0.82% , Qualcomm Inc. QCOM 0.78% and Nvidia Corp. NVDA 1.36% flocked to Munich last week for an annual auto show, lured by the promise of selling chips for new car displays, driver-assistance features and other vehicle applications.

The chip crisis highlighted to car makers how dependent they have become on semiconductors, but Intel Chief Executive Officer Pat Gelsinger told car industry officials at the event Tuesday that the appetite of the auto industry for processors is making it a more critical customer segment for semiconductor companies. A fifth of the cost of the materials that go into making premium-segment cars, he said, would be semiconductors by 2030, up from 4% in 2019.

“We need you, and you need us,” he said at the event. “This is a symbiotic future that we are off innovating and supplying as the automobile becomes a computer with tires.”

Even as cars started to sport more chips in recent years, the relationship between auto and chip makers often remained indirect. Car makers largely relied on their parts vendors to buy the chips their vehicles needed. That disconnect contributed to the auto industry’s chip crisis of recent months, car and chip-industry executives have said. Those ties are being reset, industry officials are now saying.

Daimler AG DMLRY 0.65% CEO Ola Källenius told The Wall Street Journal last week that the company was now in direct contact with chip makers to monitor supply. The German company’s luxury-car business, Mercedes-Benz, has had to juggle chip supplies, encountering delays for some models and giving priority to its most-profitable vehicles for processor allocations.

Cristiano Amon, chief executive of the mobile-phone-chip company Qualcomm, said Wednesday in Munich that the deployment of superfast 5G communications networks would help enable new car features, including the deployment of self-driving cars. Car companies, he said, “should all be seen as technology companies and part of the tech sector.” That means auto makers need to have direct ties to tech companies, he added.

Qualcomm said earlier in the week that its chips would drive infotainment systems in Renault SA’s RNO -0.32% new electric cars. The chip company agreed in January to expand its work with General Motors Co. on digital-cockpit and driver-assistance features. In another sign of Qualcomm’s interest in the automotive sector, the company last month started a $4.6 billion bid for the Swedish auto-technology company Veoneer Inc.

Analysts expect that the chip and car industries’ interdependence will only accelerate. The research firm IHS Markit Ltd. estimates that the automotive chip market will be worth around $85 billion in 2027, up from around $52 billion this year.

The automotive sector provides chip makers with considerable expansion opportunities, unlike in more-mature semiconductor markets, said Phil Amsrud, an IHS auto analyst. New mobile-phone sales largely rely on people replacing old devices, he said, while chips going into cars are growing in number and sophistication.

At the car event, Mr. Gelsinger said Intel would start a robotaxi service using its Moovit mobility app it acquired a year ago for about $900 million and leveraging the self-driving technology of Mobileye, its roughly $15 billion bet on the automotive sector four years ago. Mobileye, an Israeli autonomous-driving company, supplies technology to established auto makers including BMW AG and Ford Motor Co. for their driver-assistance features.

Mobileye said last week it plans to conduct a trial of autonomous-taxi service in Munich next year in partnership with the European rental-car company Sixt SE. Mobileye will own and supply the autonomous cars, and Sixt will maintain them.

With the distinction between cars and tech blurring, Ford said last week that it had hired Doug Field, a former Apple Inc. and Tesla Inc. executive, to be its chief advanced technology and embedded systems officer, reporting directly to Chief Executive Jim Farley.

Tesla said last month it is developing a supercomputer in-house to run the calculations to train the software for its vehicles in an effort to advance its own driver-assistance technology.

Nvidia, the U.S. chip maker with the biggest market cap, is betting that cars will become a growth center. Danny Shapiro, Nvidia’s vice president of automotive, said recently that the company has a $8 billion auto-business pipeline over the next six years.

“We’re investing, and we realize it’s a long-term game and the business opportunity is huge,” he said.

For car makers, though, the near-term focus remains on the dearth of chips to put in the current generation of vehicles. Toyota Motor Corp. said last month it would idle more than a third of its factory capacity as it coped with chip issues, after it successfully weathered the earlier stages of the crisis.

BMW CEO Oliver Zipse has said the chip shortage could remain critical for another year, while Volkswagen AG CEO Herbert Diess has warned that the auto industry would struggle with chip shortages for years.

Chip makers are responding to help mitigate the pain. Intel said Tuesday it would dedicate some manufacturing capacity at its plant in Ireland to the automotive sector. Robert Bosch GmbH and Infineon Technologies AG are also responding by expanding capacity.

The Fed blames rising inflation on an unusual jump in the price of durable products like cars and electronics, which it says won’t last

For decades, Americans have enjoyed falling prices for cars, electronics and furniture.

Until the Covid-19 pandemic, that is. For the past year, prices for durable goods have been rising—and not just by a little. Whether those prices come back down is a key part of the puzzle facing the Federal Reserve as it plots how to handle an unexpectedly strong burst of inflation.

Federal Reserve Chairman Jerome Powell has argued for a while that the higher inflation is largely driven by temporary factors unique to the pandemic. In a speech hosted by the Federal Reserve Bank of Kansas City in late August, Mr. Powell offered more details on his thinking. He singled out the sudden rise in durable goods prices—in contrast to the more modest rise in services prices—as evidence that inflation is bound to fall back to the Fed’s 2% goal.

First, a bit of history. Overall consumer prices—which combine services and goods—climbed by an average of 1.8% a year in the past 25 years leading up to the pandemic. That rise was driven by faster-rising costs for services, which grew an average 2.6% a year over that time. Prices for durable goods—items designed to last at least three years—have done the opposite—falling an average of 1.9% a year between early 1995 and early 2020, according to the Fed’s preferred inflation gauge, the Commerce Department’s price index for personal-consumption expenditures.

Mr. Powell cited several forces driving down prices for durable goods. One is globalization: Competition from other countries, in particular emerging markets with lots of low-wage workers like China and India, has stoked competition for American producers and led some to outsource production. As a result, costs for parts and products have fallen.

Another is technology. New software and more advanced machinery have enabled factories to make products in fewer hours with fewer people, reducing their own costs and ultimately translating into lower prices for consumers. More efficient shipping has also cut costs.

By contrast, prices have persistently risen for services—the bulk of consumer purchases, including haircuts, doctor’s visits and tax preparation. Because they are by default labor intensive—a barber can still only cut one person’s hair at a time—those industries haven’t raised productivity as much as factories.

The pandemic has flipped this dynamic, with durable goods becoming a big driver of inflation. In July, overall consumer prices rose 4.2% from a year earlier, according to the Commerce Department. Prices for durable goods rose 7%. That was twice as fast as the 3.5% gain in prices for services.

Durable goods prices accounted for 1 percentage point of the latest inflation rate, Mr. Powell said. The overall effect of rising durable-goods prices was even larger on “core” inflation, which excludes food and energy prices. Excluding durable goods, core inflation in the 18 months through June, which smooths out a temporary dip and rebound in some prices during the pandemic, was 2.2%, not far from its 12-year average of 2%, according to the Fed.

What happened? According to Mr. Powell, it’s no mystery: Unique forces caused demand for durable goods to rise far more quickly than supply.

Demand rose for two reasons: The government put a lot of money in the hands of consumers, through multiple stimulus packages. And households, stuck at home and with fewer opportunities to travel, dine out and visit museums, shifted spending toward durable goods, many of which could be delivered with no human contact. Researchers at the Cleveland Fed found that these two factors—the stimulus and the shift away from services caused by lockdowns—contributed equally to the rise in spending on durable goods.

Households have boosted spending on sofas, cars and kitchen appliances. Businesses, short of workers and caught off guard by the surge in demand, have struggled to ship supplies and make products fast enough. A global chip shortage disrupted shipments of laptops and printers, along with cars. Labor and equipment shortages caused delays of furniture deliveries.

Other figures show the pandemic’s effect on prices that had long experienced deflation. Consider used cars, which are the bulk of all car purchases. Their prices peaked in 2001, then declined. By February 2020, they had fallen 14% from their all-time high, according to the Labor Department’s consumer-price index, a separate inflation gauge.

Then in the summer of 2020, used-car prices started rising, sharply. In the year through July, they were up a staggering 42%. Of the dozens of major product prices tracked by the Labor Department, only gasoline rose faster.

Computers followed a similar trajectory. Before the pandemic, prices had fallen rapidly for two decades. Then, during the pandemic, they started rising. In June 2020, they rose on an annual basis for the first time ever. In July, they shot up 3.7% from a year earlier.

Or look at furniture. Between January 2000 and January 2020, prices fell 16%. Since February 2020, they have risen 7%.

Mr. Powell argued that once shortages, supply bottlenecks and demand ease, prices will drop, or at least stop rising so steeply. That may already be happening. Durable goods prices rose just 0.3% in July from a month earlier, down from 1% growth in June and 2% in May. Used-car prices also grew much more modestly, and furniture prices fell for the first time since January.

“As supply problems have begun to resolve, inflation in durable goods other than autos has now slowed and may be starting to fall,” Mr. Powell said in his Kansas City Fed speech. “It seems unlikely that durables inflation will continue to contribute importantly over time to overall inflation.”

He added that he believes the secular forces that had driven down prices for durable goods in the past—globalization and technology—won’t go away.

There are risks that inflationary pressures will be deeper and longer-lasting than Mr. Powell suggests. Gasoline prices—a nondurable good—rose just as fast as used-car prices in the year through July. Food price growth around the globe is accelerating and could persist, JPMorgan Chase said in a note last week.

Services inflation may also pick up. Home prices and rents, one of the largest components of consumption, are rising quickly. Employers in labor-intensive service businesses are facing higher labor costs that they may have to pass along in prices. Also, shipping networks could shift. Companies could decide to buy parts from other countries, or within the U.S., where labor costs are higher, which could lead to higher prices in the long run.

Mr. Powell’s outlook on durable goods—and, thus, on inflation—is a bet that the world after the pandemic will look largely the same as the world before it.

Eateries face uncertain demand, nervous diners and staffing struggles; some chains and franchisees remain split over indoor dining

Restaurants’ plans to return diners to indoor tables are unraveling.

Chains such as McDonald’s Corp. and Chick-fil-A Inc. are slowing their dining rooms’ reopenings, given the Delta-driven surge in Covid-19 infections. Other restaurants are again losing customers, and trying to squeeze more diners into outdoor patios while weather still allows.

Laurie Torres, owner of Mallorca in downtown Cleveland, said sales at her Spanish-themed restaurant had risen earlier in the summer from pandemic lows but fell again last month as diners grew nervous. Mallorca brought back interior dividers and spaced out tables again to help customers feel comfortable inside, but Ms. Torres said she expects the fall to remain tough.

“The sand is shifting again,” said Ms. Torres, who is closing early on weekends and shutting entirely on Mondays because of uncertain demand and staffing struggles. “It’s just so hard to predict.”

Covid-19’s resurgence is creating whiplash for restaurants, which have slogged through a year and a half of pandemic-related disruptions. Sales that had steadily grown earlier in the summer have fallen in the past five weeks, data from restaurant analytics firm Black Box Intelligence showed.

Bars and restaurants lost 41,500 jobs in August, the largest monthly decline of any single sector, according to Labor Department figures released earlier this month. It was the food-service industry’s first monthly decline since December.

The Delta variant has reversed some of the reopening momentum seen earlier in the summer. Rising numbers of Covid-19 cases in recent weeks have led to canceled concerts, postponed trips and the return of mask mandates.

Restaurants came into the summer with optimism as Covid-19 related restrictions eased, lifting sales. Now, nearly one in five Americans say they are no longer going out to restaurants, and 9% have canceled existing plans to eat out in recent weeks, according to a national survey of 1,000 adults by the National Restaurant Association last month.

“I’m going to stay home for a while,” said Elaine Cory, a 64-year-old North Carolina resident who was eating out and traveling for roughly four months after she was vaccinated, but has since stopped.

Shares of casual-dining restaurant chains, which depend more on dine-in sales than fast-food companies, have sagged in recent weeks. Chili’s owner Brinker International Inc. said last month that Delta had begun to depress sales, and its shares are down 16% since early June. Dave & Buster’s Entertainment Inc. shares have lost 18% and Applebee’s owner Dine Brands Global Inc.’s stock has fallen 14% over the same period.

Drive-through and to-go sales helped fast-food chains weather last year. As infections dropped earlier this year, many chains and owners wrestled with reopening their dining rooms. Fast-food companies generally have sought to resume indoor dining when allowed, but the number of customers eating their meals inside has remained below pre-pandemic levels, data from market-research firm the NPD Group shows.

Many operators have struggled to hire enough workers this year, and some have argued that it isn’t worth dedicating employees to sit-down service when indoor business remains much slower than to-go sales. Wendy’s Co. told investors last month that some of its restaurants were closing their dining rooms during parts of the day because of staffing shortages, and it supported operators’ decisions to close indoor dining if they needed to.

At Chick-fil-A, where drive-through lines at restaurants have stretched across parking lots during the pandemic, the Atlanta-based company has allowed owners to keep dining rooms closed if they wish. Last month, the chain extended that option until January out of safety concerns, and most Chick-fil-A dining rooms remain shut, a company spokeswoman said.

Dining room policies have at times divided companies and restaurant owners.

The National Owners Association, a group of McDonald’s franchisees, told the company in May that some franchisees had felt pressured by local McDonald’s corporate representatives to speed up reopening of their dining rooms earlier in the year, according to an email the group sent to its members.

“It is about when you are ready, not a count-down clock,” wrote a McDonald’s franchisee representative in the email.

McDonald’s said that the chain has worked closely with franchisees to put the well-being of restaurant employees at the forefront of its decision making. Mark Salebra, chairman of the National Franchisee Leadership Alliance, the official McDonald’s owners group, said restaurant operators are working with McDonald’s to be agile when it comes to opening and closing dining rooms in response to local case counts.

The company is asking franchisees in areas with high concentrations of Covid-19 cases to only offer to-go sales, according to McDonald’s messages to U.S. owners. In places where daily cases exceed 250 per 100,000 people on a three-week average, restaurants should consider shifting to offering to-go orders only, the company said in an email to owners late last month.

“Consumers have become more concerned as the latest outbreak has worsened,” McDonald’s said in a separate late-August message to owners. “We must re-establish and reaffirm our commitment to safety.”

Franchisees have also been divided on their approach to dining rooms. Some McDonald’s franchisees said they have willingly closed dining rooms given escalating cases. Another McDonald’s owner said he is holding off on closing his dining rooms, saying competitors remain open and shifting to to-go only risked losing sales.

For many independent sit-down restaurants, keeping customers in dining rooms remains a necessity. Some owners are now saddled with debt accrued since the start of the pandemic and said they need the sales.

Phil Simonson, owner of the Chocolate Lab restaurant and bar in Denver, came into the pandemic without any debt but now carries $100,000 in loans he took to keep his business afloat. He is paying the bills but not chipping away at his debt, Mr. Simonson said.

“Keeping our dining area open and safe is my top priority,” Mr. Simonson said. “It’s definitely a challenge.”