A spokeswoman said Viag's Chairman Wilhelm Simson indicated the merger proposal would encounter cartel problems, but that these could be solved.

Simson said the state of Bavaria, which owns 25 per cent of Viag, must approve the proposal, according to the spokeswoman. She said Simson is currently discussing the merger with Bavarian State Minister Edmund Stoiber. The Bavarian government has stated that it intends to sell its stake by the end of the current legislative term, which ends in 2003.

Meanwhile, German news agency VWD reported Wednesday that the chairmen of Veba and Viag, following a four-hour meeting in Munich, agreed on further talks on the groups' possible merger.

Veba Chairman Ulrich Hartmann said, according to VWD, that given the size of the deal, further talks must follow. Simson said the talks were productive and he wasconfident they will lead to a positive outcome, according to VWD.

The supervisory boards of both companies will meet in two or three weeks to vote on the link-up, the spokeswoman said. Once the companies have received approval from the boards and the state government, the process can begin, Simson indicated.

That process is going to include approval from Germany's Federal Cartel Office. Dieter Wolf, head of the office, said Wednesday that the case is "not yet by us." He said the two groups approached the office earlier to gauge how receptive it might be to a tie-up.

When they approach for formal approval, Wolf said his office has up to four months to review the proposal. He said his office would focus on the energy and chemicals divisions of the two groups and any potential monopoly operations. It wouldn't likely be a problem if the two include their telecommunications units in the merger, though Wolf noted one company can only hold one mobile phone license in Germany.

According to an article inWednesday's edition of the Berliner Zeitung citing unnamed sources, RWE AG would consider buying Veba's 30 per cent in the mobile phone company E-Plus. RWE already owns about 30 per cent in E-Plus.

Wolf said the European Commission, the European Union's executive body, might also want to take a look at the merger proposal.

The Viag spokeswoman declined to comment on reports that Viag is also in merger talks with RWE. "I can say that Viag is also in talks with other potential partners," she said.

The Wall Street Journal