TOKYO -- Honda and Nissan agreed to explore a merger and set up a joint holding company, they said on Monday, which would create the world's third-largest automaker and signals a massive shift in an industry under tremendous upheaval.

The two companies would aim for combined sales of 30 trillion yen ($191 billion) and operating profit of more than 3 trillion yen through the potential merger, they said in a statement.

They aimed to wrap up talks around June 2025 and then set up a holding company by August 2026, at which time both companies' shares would be delisted.

The consolidation would create the world's third-largest auto group by vehicle sales after Toyota and Volkswagen as legacy carmakers face growing challenges from Tesla and Chinese rivals.

Honda, Japan's second-biggest automaker after Toyota, has a market capitalisation of more than $40 billion, while third-ranked Nissan is valued at about $10 billion.

Honda will appoint the majority of the holding company's board, it said.

The integration of the two storied Japanese brands would mark the biggest reshaping in the global auto industry since Fiat Chrysler Automobiles and PSA merged in 2021 to create Stellantis in a $52 billion deal.

Combining with Mitsubishi Motors would take the Japanese group's global sales to more than 8 million cars. The current No 3 group is South Korea's Hyundai and Kia.

Like other foreign carmakers, Honda and Nissan have lost ground in the world's biggest market China amid the rise of BYD and other local brands that make electric and hybrid cars loaded with innovative software.

French automaker Renault, Nissan's largest shareholder, is open in principle to a deal and would examine all the implications of a tie-up, sources have said.

Shares in Honda ended the day up 3.8 percent, Nissan rose 1.6 percent and Mitsubishi Motors gained 5.3 percent after the news reports on the details of the planned merger, while the benchmark Nikkei was up 1.2 percent. 

Reuters