(Corrects paragraph 4 to say Norfolk all but rejected the offer, not rejected the offer)
Nov 18 (Reuters) - Canadian Pacific Railway Ltd said its proposed $28.4 billion acquisition of U.S. railroad operator Norfolk Southern Corp would help the combined company to save at least $1.8 billion annually.
Canadian Pacific's shares rose 5.5 percent to C$194.96 in morning trading on Wednesday in Toronto. Norfolk shares were up about 6 percent at $92.15 in New York.
The combined company will also have substantial tax benefits, Canadian Pacific said in a letter it sent to Norfolk on Tuesday.
Canadian Pacific made the letter public on Wednesday after Norfolk all but rejected the offer, calling it "low-premium" and warning of significant regulatory hurdles.
The takeover proposal "may be the first step on a journey that could see the Canadian carrier eventually going directly to Norfolk's shareholders before facing a long and drawn out regulatory process," Cowen and Co said in a note on Wednesday.
The brokerage added that a rejection by Norfolk's board is likely "a foregone conclusion," and that this could lead Canadian Pacific to sweeten the offer a bit.
Deutsche Bank analysts said the deal could test stricter U.S. merger rules governing the rail sector. The new rules were implemented following Canadian National Railway Co's failed bid to buy Warren Buffett-owned Burlington Northern Santa Fe 15 years ago.
Deutsche Bank raised its price target on Norfolk's shares to $93 from $84.
Canadian Pacific also said in the letter it had secured financing commitment of $14.2 billion from JP Morgan Securities.
Shares of North American railroad operators rose on the merger proposal. Union Pacific Corp was up about 2 percent, while Canadian National Railway gained about 3 percent.
Reporting by Amrutha Gayathri in Bengaluru; Editing by Savio D'Souza