By Maki Shiraki

TOKYO (Reuters) -Honda and Nissan are likely to unveil on Monday a pact to explore a merger by setting up a joint holding company, a person familiar with the matter told Reuters, with the aim of reaching a deal by June 2025.

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.

The Japanese automakers will hold a joint press conference following board meetings on Monday that Nissan’s alliance partner Mitsubishi Motors is also expected to attend, according to the person and a second source.

They spoke on condition of anonymity because the information was not public.

Honda and Nissan aim to finalise the deal by June 2025 and set up a holding company in August 2026, when its shares will be listed while Honda and Nissan would delist, said the first person.

Honda will appoint the majority of the holding company’s board, including its leader, the person added.

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 Mitsubishi Motors would take the Japanese group’s global sales to more than 8 million cars, surpassing the current No. 3 group, South Korea’s Hyundai and Kia.

Honda and Nissan have been exploring ways to bolster their partnership, including a merger, Reuters reported last week.

The two companies said in March they were considering cooperation on electrification and software development. They agreed to conduct joint research and widened the collaboration to Mitsubishi Motors in August.

Last month, Nissan announced a plan to cut 9,000 jobs and 20% of its global production capacity after its sales plunged in its key China and U.S. markets. Honda also reported worse-than-expected earnings due to declining sales in China.

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 making 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.

Taiwan’s Foxconn, seeking to expand its nascent EV contract manufacturing business, approached Nissan about a bid but the Japanese company rejected it, sources have told Reuters.

Foxconn decided to pause the approach after it sent a delegation to meet with Renault in France, Bloomberg News reported on Friday.

(Reporting by Maki Shiraki; Additional reporting by Norihiko Shirouzu; Writing by Kantaro Komiya; Editing by Jamie Freed and Christian Schmollinger)