Deutsche Post is in talks to buy Exel, the UK logistics company, for about £3.5 billion (€5.1 billion) in what would be the largest acquisition by Europe's biggest postal group.

Shares in Exel soared 17 per cent to 1178.5p after it confirmed the approach and analysts said the German group could have to pay 1200p-1300p per share, which would value it at up to £3.9 billion. But Deutsche Post's second-biggest shareholder after the German government said last night it viewed a fair price as 1000p and anything higher could cause upset among investors.

"It does not look a cheap deal. If you pay more than [ 1000p] or there is a counterbid then it will become harder to justify the deal," said Tim Albrecht, fund manager at DWS. Shares in Deutsche Post fell 4 per cent to €19.67 as investors fretted about it overpaying.

A deal would strengthen Deutsche Post's position in the contract logistics business - where long-term agreements are made to handle the entire supply chain - where Exel is the market leader. DHL Solutions, Deutsche Post's logistics arm, is only fifth largest, the weakest position of all the main businesses of the German group.

Klaus Zumwinkel, Deutsche Post's chief executive, said in July: "Number one is nicer than number five.

"Exel is a very well-run company with excellent management." It is understood that talks between the two groups started in the past week but that Deutsche Post was keen to retain the well-regarded management of Exel.

It is thought the German group will offer between 1150p and 1200p.

Both Exel and Deutsche Post said talks were at a preliminary stage and cautioned the outcome was uncertain. Any deal is likely to trump Deutsche Post's biggest purchase to date of DHL Express for €2.4 billion in 2002.

Alastair Gunn, analyst at Arbuthnot Securities, said: "The starting point for any offer would be a minimum of £12 and the shares are almost there. Deutsche Post will have to pay a decent premium." Many analysts believe that UPS, the US package delivery company, could also bid for Exel and might stand a better chance if Deutsche Post runs into investor hostility.

Other interested parties could include TNT of the Netherlands and Fedex of the US.

Exel is being advised by UBS and Merrill Lynch while Deutsche Post is being advised by Morgan Stanley.