Honda and Nissan officially begin merger talks to create world's third-largest automaker

Japanese automakers Nissan and Honda announced on Monday that they had entered into official talks to merge and create the third largest automaker in the world by selling.

In a press conference on Monday, the CEO of Honda Toshihiro Mibe said that the companies needed a larger scale to compete in the development of new technologies in electric vehicles and intelligent driving. Business integration would “give companies an edge that won't be possible under the current cooperation framework,” Mibe said, according to a translation.

The agreement would aim to share information and resources and deliver economies of scale and collaboration while protecting both brands, he said.

A holding company would be established as the parent company of Honda and Nissan, listed on the Tokyo Stock Exchange. The larger Honda will name most of the board members of the combined entity. The combined group has the potential to deliver revenue of 30 trillion yen ($191.4 billion) and an operating profit of more than 3 trillion yen, he said.

Honda reported 1.382 trillion yen in operating profit in the full year to March 2024, compared to Nissan's 568.7 billion yen. The companies would be worth nearly $54 billion, with Honda's market capitalization contributing the largest share of $43 billion.

Negotiations are expected to conclude in June 2025.

Mibe said that if accepted, the merger would be a medium and long-term project that is not expected to show visible progress until 2030 and beyond.

Nissan's strategic partner, Mitsubishi, has been offered the opportunity to join the new group and will reach a decision by the end of January 2025.

The companies are engaging in intense global competition in the EV market from such Tesla and BYD in China. The high cost of the EV transition for legacy companies has been around for a long time expected to drive business consolidation.

Japan Toyota it is the world's largest carmaker in terms of sales, followed by Germany Volkswagen. The Nissan-Honda tie-up would see the group overtake South Korea's Hyundai.

The agreement was proposed first reported by Japan's Nikkei newspaper on December 17th.

Nissan shares rose after the first merger report. Analysts state the possible connection is the result of it financial underperformance at the company and the restructuring of its long-standing partnership with France Renault.

In its latest quarterly results, Nissan said it would cut 9,000 jobs and reduce global production capacity by a fifth.

Honda CEO Mibe said Monday that some of the company's shareholders may feel the deal represents Honda supporting Nissan, but noted that the merger was “based on the assumption that Nissan will complete their conversion work.

“If Nissan and Honda do not stand on their own two feet, the business integration talks will not come to fruition,” he said.

Nissan CEO Makoto Uchida told reporters the merger discussion “didn't mean we've stopped turning” and was instead about ensuring the company's competitiveness for the time being to come

“After we have done this turnaround for future development, future growth, we need to look at scale and growth eventually. This growth will be through partnerships,” he said.

Nissan “has been struggling in the market, it's been struggling domestically, it doesn't have the right product range,” said Peter Wells, professor of business and sustainability at the Center for Automotive Industry Research. Cardiff Business School, to CNBC's”Street signs in Europe” Last week.

“There are so many warning signs, so many red flags around Nissan right now that something had to happen. This is another question,” Wells said.

Shares of Renault were 1.2% lower in mid-morning European deals on Monday. The company directly holds a 17% in Nissan and owns another 18.7% through a French trust, while Nissan is a strategic investor in EV Renault and software entity Ampere.

In Asia trading, Nissan divisions closed 1.2% higher ahead of the announcement, with Honda up 3.8% and Mitsubishi finishing 0.6% higher.

— CNBC's Ruxandra Iordache and Sam Meredith contributed to this story.