(Adds regulatory details; updates shares)
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.
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.
Because of a quirk in U.S. law, rail mergers are not reviewed by the U.S. Justice Department or the Federal Trade Commission but by the Surface Transportation Board (STB).
The freight industry underwent a rapid consolidation between 1980 and 2000, when the STB forced Canadian National Railway Co and Burlington Northern Santa Fe Corp to abandon a deal while it re-wrote merger rules.
Under the rules, which came into effect in 2001, the government doesn't have to prove that a merger is anti-competitive. Instead, the companies have to show that the deal is in public interest.
But, given the previous consolidation, the top four rail shippers have some 90 percent of freight traffic, says Seth Bloom, a veteran of the Justice Department.
"The STB has historically been feckless but this latest merger is a real test for them," he said.
Canadian Pacific routes are just north and south of the U.S.-Canada border and generally run east to west, while Norfolk Southern is up and down the east coast of the United States. They overlap primarily just south and east of the Great Lakes.
One group critical of railroads is the National Rural Electric Cooperative Association (NRECA), which has complained that its more remote members are at the mercy of a single shipper to deliver coal and face higher prices as a result.
"We are concerned about the merger and the potential negative impact on pricing and access," said Tracy Warren, spokeswoman for the NRECA.
Canadian Pacific also said in the letter it had secured financing commitment of $14.2 billion from JP Morgan Securities.
Canadian Pacific's shares closed up 5.6 percent at C$194.94 in Toronto, while Norfolk's stock ended up about 6.4 percent at $92.49 in New York.
Reporting by Amrutha Gayathri in Bengaluru and Diane Bartz in Washington; Editing by Savio D'Souza and Sriraj Kalluvila