Subway operator MTR Corp and government-owned commuter carrier Kowloon-Canton Railway Corp should complete tie-up negotiations by the end of August, officials said.

No financial terms of the long-anticipated union were provided, but MTR said it would work towards a solution that would win the support of its minority shareholders.

"The merger will bring about a stronger company with enhanced potential to expand in the international and mainland markets," MTR Chairman Raymond Ch'ien told a news conference.

MTR Corp, which is 76 percent-owned by the government, recently signed an agreement to invest in a subway project in neighboring Shenzhen, China, and is also bidding to participate in rail projects in the United Kingdom and Canada.

The firms had combined assets of HK$187.2 billion (US$24 billion) at the end of 2002 and more than 12,000 employees. MTR has debt of HK$32 billion, while KCRC's debt is HK$20 billion.

"There will be some synergy and elimination of competition among the two railways," said Manfred Ho, analyst at BOC International, which has an "underperform" rating on MTR.

"For the minority shareholders, it really depends on how the companies will be merged, and the valuation of MTRC and KCRC."

Larger MTR runs six rail lines and carries 2.3 million passengers each weekday, or one ride for every three Hong Kong residents. KCRC focuses on links between Hong Kong and China.

The government said it was too early to know how much the deal might bring to the territory's coffers.

"We are not looking for a short-term monetary gain from it, although we will probably end up with some," Financial Secretary Henry Tang said.

Hong Kong has said its budget deficit could hit a record HK$78 billion this fiscal year, though many economists believe it will be less than that as a rebounding economy boosts revenues.

MTR shares were suspended on Tuesday amid media reports that Hong Kong would announce the merger. The stock has risen 49 percent over the past year and ended at HK$12.85 on Monday.

Several analysts said a deal made sense.

"It's a good thing in the longer term in terms of passenger growth and cost savings, but a major concern is profit decline at KCRC, so it all boils down to pricing, which we don't have any details of," said Alex Tang, research director at Core Pacific-Yamaichi International.

The government said a tie-up would boost the financial strength and enhance the asset value of both firms. The companies had been given six months to conclude negotiations, after which the government would decide whether to merge them.

"The merger will help KCRC's profitability, make it more efficient, and enable a pricing adjustment," said Owen Chan, a tax partner at Ernst & Young in Hong Kong.

MTR and KCRC said they welcomed the move, which they said could help bring down fares in a city of nearly seven million people that relies heavily on public transportation.

Some analysts worry that the merger could be risky for MTR, which has generated the bulk of its profits from developing property above its rail stations.

HSBC credit analyst Sabita Prakash said a merger was broadly positive from a bond perspective, but deal terms would be key.

"Overall the merger may be positive from a very broad macro perspective, just because of the operational synergy between MTRC and KCRC and the fact that they would not be competing with each other, but working towards the common cause," said Prakash. "To that extent MTRC would not have to forcibly incur capital expenditure to ensure growth of its operations going forward."