The latest twist for a potential megamerger in the North American railroad industry has created an opening for investors, according to Citi. Canadian National has been locked in a bidding war with Canadian Pacific for Kansas City Southern , and Canadian National was dealt a setback this week when a U.S. regulator rejected a proposed voting trust for the deal. The company also has an activist investor moving to stop the deal. Shares dropped more than 4% on Tuesday. Despite this, Citi analyst Christian Wetherbee upgraded Canadian National to buy from neutral, saying in a note to clients on Wednesday that the concern about the proposed deal has created an opportunity that should pay off either way. "A key missing piece to the bull thesis was the catalyst for a change in tone and focus. TCI's activism seems to be that catalyst, along with the [Surface Transportation Board] voting trust rejection. The beauty of the story now becomes that investors can benefit regardless of which side wins," the note said. Once the Kansas City Southern saga is behind them, Canadian National's management can focus on internal improvements, Citi said. "While CN continues to look relatively good in terms [operating expense] efficiency on an absolute basis, using our rail benchmarking analysis, the company has not kept pace with the improvement made by the rest of the rail group," the note said. Citi raised its price target on the stock to $140 per share from $127. The new target is more than 18% above where the stock closed on Tuesday. -CNBC's Michael Bloom contributed to the report.
A Canadian National Railway locomotive pulls a line of cars through the Macmillan Yard in Vaughan, Ontario, Canada.
Norm Betts |Bloomberg | Getty Images
The latest twist for a potential megamerger in the North American railroad industry has created an opening for investors, according to Citi.