By Maki Shiraki

TOKYO (Reuters) -Honda and Nissan agreed to explore a merger and set up a joint holding company, they said on Monday, which would create the world's third-largest automaker and signals a massive shift in an industry under tremendous upheaval.

The two companies would aim for combined sales of 30 trillion yen ($191 billion) and operating profit of more than 3 trillion yen through the potential merger, they said in a statement.

They aimed to wrap up talks around June 2025 and then set up a holding company by August 2026, at which time both companies' shares would be delisted.

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.

Honda will appoint the majority of the holding company's board, it said.

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 with Mitsubishi Motors would take the Japanese group's global sales to more than 8 million cars. The current No. 3 group is 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 sales plunged in the 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 that make electric and hybrid cars loaded with innovative software.

In a separate online press conference with the Foreign Correspondents Club of Japan on Monday, former Nissan Chairman Carlos Ghosn said he did not believe the Honda-Nissan alliance would be successful, saying the two automakers were not complementary.

Ghosn is wanted as a fugitive in Japan for jumping bail and fleeing to Lebanon. His 2018 arrest for financial wrongdoing pitched Nissan into a crisis.

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.

Shares in Honda ended the day up 3.8%, Nissan rose 1.6% and Mitsubishi Motors gained 5.3% after the news reports on the details of the planned merger, while the benchmark Nikkei was up 1.2%.

($1 = 156.7000 yen)