Honda Motor Co and Nissan Motor Co are exploring a potential merger, according to people familiar with the matter, which would create a singular rival to Toyota Motor Corp in Japan and better position the combined company to face competitive challenges around the world.

Executive Vice President Shinji Aoyama said on Dec 18 that Honda is considering several options, including a merger, capital tie-up, or the establishment of a holding company, following reports overnight of talks between the carmakers. Nissan shares rose as much as 24% in early trading on Dec 18, while Honda's stock fell as much as 3.4%.

The two have been holding preliminary talks about a combination, said the people, who asked not to be identified because discussions are private. One option being considered is creating a new holding company under which the combined businesses 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.

Discussions are early stage and may not lead to an agreement, the people said.

A deal would effectively consolidate the Japanese auto industry into two main camps: One controlled by Honda, Nissan and Mitsubishi and another consisting of Toyota group companies. It would also provide them with more resources to compete with larger peers globally after downsizing long-held partnerships with other carmakers. Nissan has loosened ties with France's Renault SA and Honda has backed away from General Motors Co.

The move toward a merger would follow a decision by the two companies earlier this year to work together on electric vehicle (EV) batteries and software. At that time, Honda Chief Executive Officer Toshihiro Mibe floated the possibility of a capital tie-up with Nissan.

The two Japanese carmakers plan to sign a memorandum of understanding to discuss shared equity stakes in a new holding company, Nikkei reported earlier in the day. The merger would help the manufacturers compete against rivals in EVs such as Tesla Inc and Chinese automakers, it said.

In some ways, it could be seen as a defensive merger among Japan's weaker players. Honda, Nissan and Mitsubishi combined sold about four million vehicles globally in the first six months of the year, well shy of the 5.2 million that Toyota sold on its own. Combining forces would allow the two companies to fend off Toyota, the world's largest automaker, at home and abroad. Toyota has taken stakes in Subaru Corp, Suzuki Motor Corp and Mazda Motor Corp, creating a powerhouse of brands backed by its top-notch credit rating.

Bloomberg