CN Files Motion in UP-NS Merger Review, Amplifying Regulatory Uncertainty

What happened

Canadian National Railway has filed a motion to force disclosure in the regulatory review of the Union Pacific-Norfolk Southern merger, citing an incomplete application that prevents assessing potential competition harms. This move reflects CN's defensive strategy outlined in the DeepValue report, which highlights its reliance on cost cuts and capex normalization amid tariff headwinds and flat volumes. The merger could consolidate competitive pressure on CN's cross-border intermodal and merchandise segments, where it already faces yield erosion from U.S. tariffs and weak industrial demand. CN's action underscores proactive engagement in regulatory processes, aligning with identified risks such as safety mandates and reciprocal switching rules that threaten its operating ratio and guided 2026 capex of C$2.8 billion. While this may influence merger outcomes, it reinforces the regulatory overhang that caps CN's upside, consistent with the report's base case valuation of $105 dependent on stable competitive dynamics.

Implication

This motion signals CN's vulnerability to industry consolidation, which could erode its pricing power in key corridors and necessitate deeper cost cuts to sustain mid-single-digit EPS growth. From the report, regulatory interventions often prolong uncertainty, potentially delaying CN's capex normalization thesis and increasing the likelihood of mandated safety spend above C$2.8 billion. If the merger proceeds with limited disclosure, CN might face intensified competition, aligning with the bear case where volumes stagnate and operating ratio drifts into the mid-60s. Conversely, successful transparency efforts could mitigate some risks, but the overall investment landscape remains clouded by tariff escalation and labor constraints. Thus, this development accentuates the need for investors to monitor Q4 2025 results and regulatory responses closely before considering entry, as per the report's re-assessment window of 6-12 months.

Thesis delta

The core thesis of waiting for a valuation pullback or evidence of sustained capex discipline remains intact, but this news accentuates the regulatory risk component. It introduces competitive uncertainty that could pressure CN's market position, slightly skewing the risk-reward balance towards the bear scenario if merger outcomes weaken its pricing power without offsetting cost efficiencies.