According to the local news last night a merger is not on the cards.
TAP would be interested in helping Varig if (and this is a very big if) the foundation that holds 87% of Varig relinquishes control of the company. That is highly unlikely.
Varig actually runs at a daily loss, and they owe money to protected creditors (the government, Petrobras, Infraero) who may or not wait to see what happens. VASP went to the wall because these organizations wanted their payments.
The financial commentators last night were suggesting that the only way out for Varig is to declare themselves bankrupt and start again.
Tony