Japan December 3, 2009, 12:09PM EST

A Peugeot and Mitsubishi Deal: Why?

The French and Japanese automakers want to repeat the Renault-Nissan magic but will have a hard time making a deal work

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A decade after Renault shocked the auto world by buying a controlling stake in Nissan (NSANY), another Franco-Japanese alliance is in the cards. PSA Peugeot Citroen, Europe's second-biggest carmaker, is mulling a decision to take control of Mitsubishi Motors.

According to a Japanese newspaper, the Nikkei English News, Peugeot could spend up to $3.5 billion to buy a 30% to 50% stake in the ailing Japanese automaker. The paper added that Mitsubishi may take a stake in Peugeot as part of the deal. With sales of 4.45 million vehicles in 2008, the combination of Peugeot and Mitsubishi would be the world's sixth-largest automotive group.

The two companies are also looking at even more ambitious plans. A source close to the French automaker told Bloomberg BusinessWeek that Peugeot is considering taking a 53% stake in Mitsubishi Motors, an investment worth about $3.8 billion before the news lifted Mitsubishi shares 13.4% by the 3pm market close. Mitsubishi Motors would then take an 18% stake in Peugeot. He added that Peugeot lawyers are currently conducting due diligence and that an extraordinary meeting for its board, led by Philippe Varin, could be called in the next month to study the proposal. A vote on whether to proceed could follow as early as January. "There's a lot of movement on this," said the source, who asked not to be identified because he was discussing confidential company plans. "Unless something new comes up, it's likely to happen."

Mitsubishi declined to comment on the details of the rumored alliance but said it was "open to any possibility of deepening our existing relationship." Peugeot said it was looking into a strategic partnership with Mitsubishi. Shares at the Japanese company soared by as much as 22% during intra-day trading, closing at 135 yen, up 13.45%. Peugeot shares leaped 4.2% at the news.

independence and synergy

Taking control of Mitsubishi Motors would constitute a brave move by Peugeot. The tie-up would be the third time a foreign automaker has had a significant stake in the Tokyo-based company. In the 1970s, Chrysler took a 15% stake, increasing it to over 20% in the 1980s, though by 1993 it had sold all its shares. More recently, between 2000 and 2001, Daimler bought a controlling 37% for $2.4 billion. The deal, beset by a costly recall scandal and cultural difficulties, wasn't a success, and the German company had sold all its stock by the end of 2005, recouping less than half of its original investment.

The two automakers will hope that any deal will have more in common with the Renault-Nissan alliance, which industry watchers regard as unusually successful. That could be one reason Peugeot and Mitsubishi may use a similar ownership template. Nissan, Japan's No. 3 carmaker, is 44% owned by Renault, while Nissan has a 15% stake in Renault. That setup allows both to function independently yet achieve big savings through joint purchasing agreements and vehicle development.

Analysts aren't hopeful of a repeat, however. "Nissan's turnaround was a combination of Nissan's excellent manufacturing and R&D capabilities and [CEO] Carlos Ghosn's exceptional ability at crisis management," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo. "It is optimistic to expect similar things from Mitsubishi Motors."