*

Nissan's ( NSANF ) pride and denial hindered merger talks, sources

say

*

Honda ( HMC ) pushed Nissan for deeper cuts to jobs, factory

capacity,

sources say

*

Nissan unwilling to consider factory closures, sources say

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Honda's ( HMC ) proposal to make Nissan a subsidiary caused

tensions,

sources say

By Maki Shiraki, Daniel Leussink, Norihiko Shirouzu

TOKYO, Feb 12 (Reuters) - Nissan was deep in

trouble late last year when rival Honda ( HMC ) offered a

lifeline: a $60 billion tie-up that would help both Japanese

automakers compete against the Chinese brands upending the car

industry.

Years of faltering sales and management turmoil had left Nissan

a diminished force, especially after it underestimated demand

for hybrids in the U.S., its top market.

But the merger talks unravelled in a little more than a

month due to Nissan's ( NSANF ) pride and insufficient alarm about its

predicament, as well as Honda's ( HMC ) abrupt decision to revise the

terms and propose that Nissan become a subsidiary, according to

six people familiar with the matter.

Nissan, which for years until 2020 was Japan's

second-largest automaker behind Toyota, insisted on receiving

near-equal treatment in the talks despite its weaker position,

three of the people said.

Honda ( HMC ) pressured Nissan to make deeper cuts to its workforce

and factory capacity, but Nissan was unwilling to consider

politically sensitive factory closures, three of the sources

said. They said they were left with the impression Nissan felt

it could recover on its own, despite its mounting difficulties.

That intransigence, combined with what Honda ( HMC ) management saw

as Nissan's ( NSANF ) slow decision-making, helped torpedo a deal that

would have created one of the world's largest automakers, three

people said.

This account of the forces that scuttled the mega merger

features previously unreported information, including details

about factories Nissan wanted to keep open, its resistance to

Honda's ( HMC ) pressure for deeper cuts, and the reaction inside Nissan

to some of Honda's ( HMC ) demands. The story is based on Reuters

interviews with more than a dozen people, all of whom spoke on

the condition of anonymity because of the topic's sensitivity.

The reporting sheds new light on the thinking inside Nissan as

it faces a deepening crisis. The storied carmaker now faces the

added threat of U.S. tariffs on vehicles made in Mexico, which

account for more than a quarter of its U.S. sales. Both Nissan

and Honda ( HMC ) are due to report earnings on Thursday.

"I think it's a management problem," said Julie Boote,

analyst at research firm Pelham Smithers Associates, about the

turmoil at Nissan. "They're completely overestimating their

position and their brand value, and their ability to turn around

the business."

Nissan and Honda ( HMC ) declined to comment on the specific aspects

of the talks as described by Reuters sources.

Nissan CEO Makoto Uchida visited his counterpart Toshihiro

Mibe last week to say he wanted to end discussions after Honda ( HMC )

made the subsidiary proposal.

Both automakers have said they would provide an update this

month.

TOO LITTLE, TOO LATE

Nissan stunned investors in November when it cut its profit

forecast by 70% due to worsening sales in China and the United

States. Its announced a turnaround plan that involved cutting

9,000 jobs and one-fifth of global capacity, which some analysts

saw as too little, too late.

Uchida promised to forfeit half his pay and said he was

focused on making the business leaner and more resilient.

In December, Nissan and Honda ( HMC ) announced plans to merge, an

outgrowth of talks they had been holding since March 2024, when

they said they were looking to cooperate on technology.

But the merger discussions quickly hit a wall over

calculating the shareholding ratio for the combined company, two

of the people said.

In private, Uchida exhibited doubts about the deal's

prospects, one of the people said. Honda ( HMC ) managers complained

that Nissan's ( NSANF ) decision-making was too slow, four people said. A

public update on the talks was originally set for the end of

January before being pushed back to mid-February.

Honda ( HMC ) managers felt Nissan's ( NSANF ) turnaround strategy lacked

details and were frustrated by what they saw as an insufficient

reduction in factory capacity, two sources said.

Reuters could not determine whether Honda ( HMC ) requested a

certain number of job cuts or identified specific factories for

capacity reductions.

Nissan didn't want to shut factories because that would

force a write-down of their value on paper and hurt its

earnings, one person said.

The job cuts already promised as part of Nissan's ( NSANF ) turnaround

plan amounted to 7% of its global workforce. It was telling, one

person said, that Honda ( HMC ) had cut more people in China over the

last two years.

Honda ( HMC ), for its part, appeared unwilling to budge on its

plans, implying it didn't consider Nissan an equal, one person

familiar with Nissan's ( NSANF ) thinking said.

KYUSHU VISIT

In late January, Nissan executive Hideyuki Sakamoto visited

the southwestern island of Kyushu to announce plans for a

battery EV plant that would create 500 jobs.

Flanked by local politicians, Sakamoto said the automaker

wouldn't reduce capacity at its existing Kyushu plant, either.

Kyushu was a "highly competitive base geopolitically" and

important for future EV plans, he said.

The day after Sakamoto's visit to Kyushu, Honda's ( HMC ) Mibe told

Uchida that Nissan would need to become a Honda ( HMC ) subsidiary, a

stipulation not in the original merger memorandum of

understanding the two companies signed late last year, according

to one person.

Reuters could not determine whether Mibe's move was

triggered by Nissan's ( NSANF ) announcements in Kyushu. Nevertheless, the

Kyushu trip crystallised the tensions between the companies over

the best way forward.

Kyushu wasn't the only plant that Nissan considered

untouchable. Smyrna in Tennessee, Aguascalientes in Mexico and

Britain's Sunderland were all seen as critical to the company's

EV strategy, and the automaker didn't want to close them or

reduce their lines, one source said.

Honda's ( HMC ) abrupt change to the deal's structure reflected its

mounting impatience with Nissan over the pace of negotiations,

two people said.

Nissan was blindsided by that move, given that it went

against the previously agreed memorandum, two of people said.

Inside Nissan, the proposal was seen as "outrageous" and an

affront to the dignity of Nissan, the older automaker, one

person said.

Renault, Nissan's ( NSANF ) top shareholder, said while it was not

privy to the discussions, the latest information suggested the

transaction would result in a "takeover of Nissan by Honda ( HMC )

without a control premium for Nissan shareholders". Such an

outcome was "not acceptable", Renault said, adding it would

"vigorously defend" its interests.

NEW PARTNERS

It's not clear what, if anything, could bring the automakers

back to the table. It seems likely they would revert to their

original agreement to team up on technology, three of the people

said.

If both companies agree to end the discussions, neither

would be liable for a 100 billion yen ($650 million) break-up

fee, according to their December memorandum of understanding.

Nissan is open to working with new partners, including Foxconn

, the Taiwanese contract manufacturer that makes

Apple's iPhones, Reuters has reported. Foxconn did not respond

to a request for comment.

Foxconn Chairman Young Liu said on Wednesday that its aim was to

cooperate with Nissan, not acquire it.

The Taiwanese company's EV business is led by former Nissan

executive Jun Seki, who at one point was seen by insiders as a

contender to become the carmaker's CEO.

Foxconn would likely be a more generous suitor than Honda ( HMC )

because it needs a brand name in the auto industry, and Nissan

could be attractive, said Amir Anvarzadeh, a strategist with

Japan equity advisory firm Asymmetric Advisors.

"No matter what you think about their cars and their balance

sheet and so forth, at least the brand is still fairly

recognisable," he said of Nissan.

So far, Japan's government has given little sense of how it

sees the breakdown in talks between Honda ( HMC ) and Nissan, nor

whether it would be open to an acquisition of Nissan by Foxconn,

which is also the top shareholder in consumer electronics

company Sharp Corp.

For Nissan, the question now is what management will do,

said Boote.

"They don't have a realistic view of what's happening in the

auto industry and what really needs to happen with Nissan."

($1 = 153.5600 yen)