Farmers Insurance Group Inc. agreed to discuss a $4.9 billion buyout offer from Batus Inc., but warned it still has reservations about the proposed friendly merger. On a separate front in the eight-month takeover battle, the insurer vowed to appeal a ruling by regulators in Illinois Tuesday giving a tentative green light to a Farmers-Batus merger in that state. Farmers' offer to negotiate was the first significant easing of the company's opposition to a buyout by Batus, a Louisville, Ky.-based tobacco and retailing company. Despite the offer of negotiations, Farmers has a number of objections to a merger, said Leo E. Denlea Jr., Farmers' chairman and chief executive. ``Farmers' board of directors has made no decision concerning a sale of the company,'' Denlea said in a news release. ``...We will have to address the issues being raised in the insurance regulatory hearings, and the concerns of our insurance exchanges, in a comprehensive fashion if there is to be any prospect for a transaction.'' A Batus spokesman said the company had no immediate comment but was preparing a statement. Batus, a subisidiary of BAT Industries PLC of Britain, is seeking to acquire Farmers to gain a foothold in the American financial services business. Farmers is the nation's third biggest auto and home insurer and seventh biggest property and casualty insurer. Top management of Farmers declined to negotiate after Batus announced its initial proposal early this year, and Batus took its offer directly to shareholders with a cash tender offer. That offer now stands at $63 a share, or about $4.4 billion. Last week, Batus announced it would be willing to pay $72 a share for the company if Farmers' management agreed to back the bid. It was the latter proposal, which values the company at approximately $4.9 billion, that won Farmers' agreement to negotiate. Farmers has contested Batus' overtures in mailings to shareholders, in court, and in hearings before insurance regulators in nine states where authorities must approve such a merger. On Tuesday, the Illinois Department of Insurance approved a takeover by Batus as long as the company agreed to maintain Farmers' fees and various lines of insurance, and to continue non-smoker discounts. Batus spokesman Wilson Wyatt said the company has already agreed to meet those conditions. A Farmers spokesman said the company intended to appeal the decision. In the various insurance hearings, Farmers, noting Batus owns the company that makes Kool and Viceroy cigarettes, has suggested a buyout could bring an end to the company's insurance discounts for non-smokers. Though Batus officials have maintained they would do no such thing, Farmers' representatives have suggested an insurer owned by Batus would de-emphasize anti-smoking policies and advertisements. Ohio regulators have approved the merger with conditions similar to those made by Illinois, and Arizona regulators also approved the deal. Idaho, Washington and Oregon have rejected it and decisions or hearings are pending in Texas and Kansas. California regulators rejected the merger, but that decision was overturned by a state court. Most of the decisions are in various stages of appeal. Farmers has 68.4 million shares outstanding, and employees hold options to buy an additional 1.5 million new shares, bringing the total of shares likely to be bought in an unfriendly takeover to 69.9 million.