Milan

FIAT Chrysler has made a "transformative" merger proposal to Renault, the Italian-American car maker said of a deal that would create a new third-ranked global manufacturer.

The plan, finalised in overnight talks with Renault, was discussed at a meeting of the French group's board early on Monday, and sent shares in both companies sharply higher.

The deal would create a car maker selling 8.7 million vehicles annually with a strong presence across key regions, automotive markets and technologies, Fiat-Chrysler Automobiles (FCA) said. It would generate five billion euros (S$7.7 billion) in estimated annual savings.

The "broad and complementary brand portfolio would provide full market coverage, from luxury to mainstream," FCA added. If successful, the tie-up would alter the competitive landscape for rival car makers from General Motors to Peugeot maker PSA Group, which recently held its own inconclusive talks with FCA.

It could also have profound repercussions for Renault's 20-year-old alliance with Nissan, already weakened by the crisis surrounding the arrest and ouster of former chairman Carlos Ghosn late last year.

Milan-listed Fiat Chrysler shares jumped 19 per cent in early trade, while Renault stock leapt 17 per cent. PSA shares fell 2.5 per cent.

Under the FCA-Renault plan, the two car makers merged under a listed Dutch holding company. After payment of a 2.5 billion-euro dividend to current FCA shareholders, each investor group would receive 50 per cent of stock in the new company.

It would be chaired by John Elkann, head of the Agnelli family that controls 29 per cent of FCA, sources familiar with the deal talks told Reuters. Renault chairman Jean-Dominique Senard would likely become CEO, one said.

FCA-Renault, like almost every possible automotive pairing, had been studied intermittently for years by deal makers. But the fractious relations between Mr Ghosn and FCA's late CEO Sergio Marchionne made constructive merger talks impossible until after Mr Marchionne's sudden death last July, banking sources said.

Pressure for consolidation among car makers has grown with the challenges posed by electrification, tightening emissions regulations and expensive new technologies being developed for connected and autonomous vehicles.

"The case for combination is also strengthened by the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry," FCA said.

But the deal still faces political and workforce hurdles in Italy, and potentially also in France. Most of FCA's European plants are running below 50 per cent capacity.

Fiat said the planned cost savings would not depend on factory closures.

Evercore ISI analyst Arndt Ellinghorst said: "The market will be careful with these synergy numbers, as much has been promised before and there isn't a single merger of equals that has ever succeeded in autos." Investors are likely to remain wary of the execution risks of a French-Italian-US tie-up, he added, "even with fewer big egos involved".

The French government, Renault's biggest shareholder with a 15 per cent stake, supports the merger in principle, but needs to see more details, its spokesman said on Monday.

France will be "particularly vigilant regarding the employment and industrial footprint", another Paris official said - adding that any deal must safeguard Renault's alliance with Nissan, which had recently rebuffed a merger proposal from the French car maker.

The Italian government may also seek a stake in the combined group to balance France's holding, a law maker from the ruling League party said on Monday.

Anticipating such sensitivities, FCA stressed "new opportunities for employees of both companies" under the merger. "The benefits of the proposed transaction are not predicated on plant closures, but would be achieved through more capital-efficient investment in common global vehicle platforms, architectures, powertrains and technologies."

Nissan, which is 43.4 per cent -owned by Renault, would be invited to nominate a director to the 11-member board of the new combined company, under the plan presented on Monday. As alliance partners, Nissan and its affiliate Mitsubishi would benefit from an estimated 1 billion euros in annual savings from the merger, FCA also said. REUTERS