(Reuters) - Canadian Pacific Railway Ltd (>> Canadian Pacific Railway Limited) said its proposed $28.4 billion acquisition of U.S. railroad operator Norfolk Southern Corp (>> 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 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 (>> Canadian National Railway Company) 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 (>> Union Pacific Corporation) was up about 2 percent, while Canadian National Railway (>> Canadian National Railway Company) gained about 3 percent.

(Reporting by Amrutha Gayathri in Bengaluru; Editing by Savio D'Souza)