Shares in both companies rose more than 12% in early European trading.
If Renault and Fiat Chrysler merge, it would create a car company with a combined value of about $37 billion and annual vehicle production of almost nine million passenger cars and light trucks. Such a combination would only rank behind Volkswagen AG and Toyota Motor Co. and ahead of General Motors Co. Including Renault’s alliance partners, Nissan Motor Co. and Mitsubishi Motors Corp., output would swell to around 15 million, far ahead of the pack.
Complicating any deal is a 20-year-old partnership between Renault and Nissan, in which they share technology and vehicle parts. Renault owns 43.4% of Nissan, while Nissan owns 15% of Renault. The Renault-Nissan relationship has come under strain as the two sides debate whether to overhaul the cross-shareholding arrangement and how to make joint decisions on future models and technologies.
Those differences have been exacerbated by the arrest last year of auto titan Carlos Ghosn, who forged the alliance. Mr. Ghosn has been indicted by Tokyo prosecutors on charges including diverting Nissan money for personal gain. He says he is innocent and was released on bail last month.
Nissan’s CEO Hiroto Saikawa told Japanese media Monday that he is “open to any forward-looking discussions to strengthen the alliance.” Mr. Saikawa, who declined to say whether he was notified of the merger proposal, is expected to attend a previously scheduled meeting with top executives from Renault on Wednesday in Japan.
There is no guarantee Fiat and Renault will reach an agreement. They are both considered symbols of national industry in their home countries, and national pride has often kept car makers across Europe independent. But as demand slows for new cars, companies are more closely weighing the advantages of global scale.
Fiat Chrysler said its proposal came after an initial period of discussions with Renault to identify products and markets where they could collaborate to better meet the expensive challenge of electric vehicles, self-driving cars and in-car connectivity. The discussions made clear that a full merger was the most efficient option, Fiat Chrysler said.
Fiat Chrysler said the two companies had complementary strengths. Renault is strong in the low-cost sector with its Dacia and Lada brands, as well as in the mass-market segment with its namesake Renault brand. Fiat Chrysler meanwhile sells more trucks and SUVs and owns the luxury brand Maserati. Geographically, Fiat Chrysler has a strong presence in the lucrative U.S. market, where Renault is absent, and has a big business in Latin America. Renault has a strong presence across Europe, Russia, Africa and the Middle East.
Before the deal closes, Fiat Chrysler shareholders will also receive a dividend of EUR2.5 billion ($2.8 billion) to mitigate the disparity in the market value of the two companies and ensure that the deal doesn’t end up being a takeover of Renault by Fiat Chrysler and the Agnelli family, its controlling shareholder. On Friday, Fiat Chrysler had a market value of $20 billion, while Renault was worth about $17 billion.
Fiat Chrysler said the deal will eventually deliver more than EUR5 billion in annual combined cost savings, mainly from sharing vehicle platforms and engineering resources and cooperating in areas such as R&D. It added that these cost cuts weren’t predicated on plant closures — a politically charged issue in both France and Italy where governments have a history of intervention.
The deal would also result in synergies for Renault’s alliance partners, Fiat Chrysler said, adding that it “sees significant expected benefits to all parties from the expanded partnership.”
Renault’s alliance with Nissan, which Mitsubishi joined later, was once held up as an example of how to address the high costs of developing and building new cars, without the perils of a full merger. Sharing vehicle platforms and engineering resources, and cooperating in areas such as procurement can help car makers cut costs.
But Renault and Nissan have been at odds since the arrest last year of Mr. Ghosn, who was chairman of both companies at the time. Also, the billions of dollars in savings that alliance members claim come from synergies have failed to translate into higher profitability than some of their regional peers.
Renault approached Nissan last month to propose a full blown merger between the two, but was rebuffed. A merger between Fiat and Renault would shelve those plans, said a person familiar with the Fiat-Renault deal.
“Nothing is going to happen on the alliance side for a while,” the person said. “Nissan has to get its house in order first.”
Profit at Nissan is expected to plunge this year as the Japanese auto maker seeks to overhaul its business in the U.S.
Renault Chairman Jean-Dominique Senard met with French Finance Minister Bruno Le Maire on Friday and presented the merger plan, a person familiar with the matter said. The French state, which owns 15% of Renault, isn’t opposed to a merger, the person said.
A French official said Paris notified the Japanese government about a potential deal after learning on Friday that Renault’s board was expected to review it in the coming days.
The French state will evaluate the final proposal with an open mind, the official said, adding the deal needs to make sense on an industrial level and have the potential to create a company with the heft to invest considerable sums in developing electric and autonomous vehicles.
The official added that the government will be “particularly vigilant” on how such a deal affects jobs at the auto makers.
People familiar with the matter have said Nissan hasn’t been involved in the talks between Renault and Fiat Chrysler. Analysts said adding Fiat Chrysler’s pickup trucks and Jeep SUVs to the alliance’s operations in the U.S. could compliment Nissan’s lineup, providing it with economies of scale in a market where it has recently under performed.
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