Fiat Chrysler pitched a finely balanced merger of equals to Renault on Monday to confront the costs of far-reaching technological and regulatory changes by creating the world's third-biggest automaker.
If it goes ahead, the $35 billion-plus tie-up would alter the landscape for rivals including General Motors and Peugeot maker PSA Group, which recently held inconclusive talks with Fiat Chrysler (FCA), and could spur more deals.
French group Renault said it was studying the proposal from Italian-American FCA with interest, and considered it friendly.
Shares in both companies jumped more than 10 percent as investors welcomed the potential creation of a company that would produce more than 8.7 million vehicles a year and aim for 5 billion euros ($5.6 billion) in annual savings.
It would rank third in the global auto industry behind Japan's Toyota and Germany's Volkswagen.
But analysts also warned of big complications, including Renault's existing alliance with Nissan, the French state's role as Renault's largest shareholder and potential opposition from politicians and workers to any cutbacks.
"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," Evercore ISI analyst Arndt Ellinghorst said.
With these sensitivities in mind, FCA proposed an all-share merger of equals under a listed Dutch holding company. After a 2.5 billion euro dividend for existing FCA shareholders - giving a big upfront boost to the Agnelli family that controls 29% of FCA - investors in each firm would hold half of the new entity.
The merged group would be chaired by Agnelli family head John Elkann, sources familiar with the talks told Reuters, while Renault chairman Jean-Dominique Senard would likely become CEO.
Italian Deputy Prime Minister Matteo Salvini said the proposed merger could be good news for Italy if it helped FCA to grow, but it was crucial to preserve jobs.
He did not comment on the French government's 15% stake in Renault, but an influential lawmaker from the ruling League party said Rome may seek a stake in the combined group to balance France's holding.
A deal 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. The Japanese carmaker has yet to comment on FCA's proposal.
In a letter to employees seen by Reuters, FCA chief executive Mike Manley cautioned a merger with Renault could take more than a year to finalise.
A deal could help both companies address some of the shortcomings that have led their market valuations to lag major rivals, as well as the challenges of switching to electric and self-driving technologies and tougher emissions regulations.
FCA has highly profitable businesses in North America with its RAM trucks and Jeep brand, but lost money last quarter in Europe, where most of its plants are running below 50% capacity and it faces a struggle with new emissions curbs.
Renault, by contrast, was an early mover in electric cars, has relatively fuel-efficient engine technologies and a strong presence in emerging markets, but no U.S. business.
A deal would do little, however, to address both firms' limited presence in China, the world's biggest auto market.
FCA said the case for a merger was "strengthened by the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry."
The huge cost of these changes, including meeting the threats posed by new market entrants such as Tesla in electric cars as well as Uber and Google in self-driving vehicles, has pushed other automakers to work more closely together, including Volkswagen and Ford.
FCA-Renault, like almost every possible automotive pairing, has been studied intermittently for years by dealmakers. But the fractious relations between Ghosn and FCA's Sergio Marchionne made constructive merger talks impossible before the former CEO's sudden death last July, banking sources said.
Paris and Rome
The French government, Renault's biggest shareholder, supports a merger with FCA in principle but will need to see more details, its main spokeswoman said.
France will be "particularly vigilant regarding employment and industrial footprint," another Paris official said. Any deal must safeguard Renault's alliance with Nissan, which recently rebuffed a merger proposal from its partner, the official added.
Seeking to soothe concerns, FCA stressed "new opportunities for employees of both companies".
"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," it said.
Industry bankers said most of the savings were likely to come from procurement, and FCA in particular would benefit from Renault's work on electric and self-driving vehicles where it had done little itself. However, they were sceptical the companies could avoid job losses in Europe.
One source familiar with the matter said FCA had proposed to guarantee industrial jobs and existing sites, leaving scope for white-collar and engineering layoffs as well as some plant downsizing.
Appealing to Nissan, which is 43.4%-owned by Renault, FCA said the Japanese carmaker would be invited to nominate a director to the 11-member board of the new company.
As alliance partners, Nissan and its affiliate Mitsubishi would benefit from an estimated 1 billion euros in annual savings from the merger, FCA added.
But analysts said Nissan brought another layer of complexity.
"We now have the French, the Italians, the Japanese and the Americans needing to find consensus on the a board of a Dutch company, where the French state stands to lose its special status," Ellinghorst said.