(Bloomberg) — Honda Motor Co. and Nissan Motor Co. are investigating a possible merger that would create a unique rival for Toyota Motor Corp., according to people familiar with the matter. in Japan and better position the combined company to meet competitive challenges around the world.
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Honda is considering several options, including a merger, capital ties or the creation of a holding company, Executive Vice President Shinji Aoyama said on Wednesday after reports of talks between the automakers. Aoyama declined to explain when a possible decision will be made.
The companies could make an announcement on December 23, TBS reported. Shares of Nissan rose as much as 24% in early trading in Tokyo on Wednesday, while shares of Honda fell as much as 3.4%.
The two have had preliminary talks about a combination, said the people, who asked not to be identified because the discussions are private. One of the options being considered is the creation of a new holding company under which the combined companies would operate, one of the people said. The transaction could also be expanded to include Mitsubishi Motors Corp., which already has capital ties with Nissan, the person said. Mitsubishi shares rose 17%.
The talks are at an early stage and may not lead to an agreement, the people said.
A deal would effectively consolidate Japan’s auto industry into two main camps: one controlled by Honda, Nissan and Mitsubishi and the other made up of Toyota group companies. It would also give them more resources to compete globally with larger peers after downsizing long-standing partnerships with other automakers. Nissan has cut ties with France’s Renault SA and Honda has withdrawn from General Motors Co.
The move towards a merger would follow a decision by the two companies earlier this year to collaborate on batteries and software for electric vehicles. At the time, Honda CEO Toshihiro Mibe suggested the possibility of a capital tie with Nissan.
“If the merger materializes, it would provide short-term relief to Nissan’s financial woes,” said Tatsuo Yoshida, senior auto analyst at Bloomberg Intelligence.
The two Japanese automakers plan to sign a Memorandum of Understanding to discuss shared equity interests in a new holding company, the Nikkei reported earlier in the day. The merger would help the manufacturers compete with electric vehicle rivals such as Tesla Inc. and Chinese automakers, the report said.
In some ways it could be seen as a defensive merger between Japan’s weaker players. Honda, Nissan and Mitsubishi sold about 4 million vehicles worldwide in the first six months of the year, well below the 5.2 million Toyota sold on its own. By joining forces, the two companies could keep Toyota, the world’s largest automaker, at home and abroad. Toyota has taken shares in Subaru Corp., Suzuki Motor Corp. and Mazda Motor Corp., creating a powerhouse of brands backed by its excellent credit rating.
“While this would be good news for Nissan given their weakened state, they would have to overcome a lot of overlap and other issues,” said Julie Boote, senior analyst at Pelham Smithers Associates. “For the Toyota Group, however, we could see an acceleration there, as the group gathers its flock more firmly under its wing in a show of commitment, with the opportunity to increase its stakes in Subaru, Suzuki and Mazda sooner rather than later.”
Honda’s valuation stood at ¥6.8 trillion ($44.4 billion) at the end of trading on Tuesday, well above Nissan’s market capitalization of ¥1.3 trillion. But even their combined value pales in comparison to Toyota’s ¥42.2 trillion.
Toyota shares rose as much as 2.5% on Wednesday.
Honda’s struggle
Honda has long struggled to keep pace with larger-capitalized rivals when it comes to investing in new technologies. The company recently shifted gears to boost gas-electric hybrid vehicles even as it spends billions of dollars on all-electric production. At the same time, Honda’s arm’s length partnership with GM has weakened, most recently earlier this month when their partnership on self-driving cars ended. GM has ties with South Korea’s Hyundai Motor Co.
Greater scale could be Honda’s biggest advantage, said James Hong, an analyst at Macquarie Securities Korea Ltd. “That’s what Honda expects to gain from this partnership,” Hong said.
Nissan needs a partner to put the company back on stronger financial footing as it steps up restructuring efforts to cope with stalled sales growth and lower profits. It faces pressure from an activist shareholder and a huge debt load that has led to speculation in credit markets over its investment grade rating.
The Yokohama-based company has partially dissolved its complex 25-year strategic partnership with Renault, a fixation of former chairman Carlos Ghosn. The rivalry and mutual distrust increased over the years and came to a head when Ghosn openly considered a merger, contributing to his downfall.
The former chairman and CEO, who has filed suit against his former company for ousting him in 2018, warned of a “disguised takeover” of Nissan by Honda in an interview with Automotive News in August.
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The merger talks come after the Financial Times said last month that Nissan was looking for an anchor investor to replace some of Renault’s shareholding and that it had not ruled out Honda buying some of its shares.
–With help from Tsuyoshi Inajima, Chester Dawson, Nicholas Takahashi, Shadab Nazmi, Danny Lee and Yasufumi Saito.
(Adds possible announcement date in third paragraph.)
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