A view of Fiat Chrysler Automobiles logo in Italy Photo: IC

Fiat Chrysler Automobiles (FCA) pitched a finely balanced merger of equals to Renault to tackle 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 FCA, and could spur more deals.

Renault said it was studying the proposal from Italian-American FCA with interest, and considered it friendly.

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 under a listed Dutch holding company. After a 2.5 billion euro ($2.79 billion) dividend for existing FCA shareholders - giving a big upfront boost to the Agnelli family that controls 29 percent of FCA - investors in each company would hold half of the new entity.

The merged group would be chaired by Agnelli family scion John Elkann, sources familiar with the talks said, while Renault chairman Jean-Dominique Senard would likely become CEO.

Renault's board will likely decide later whether to enter into an agreement with FCA to proceed with merger talks, two sources said.

Italian Deputy Prime Minister Matteo Salvini welcomed the merger proposal but said Rome may need to acquire a stake, balancing France's 15 percent Renault holding - which is set to be diluted to 7.5 percent of the combined group.

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 finalize.

Bold decisions

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 shift to electric and self-driving technologies amid tightening emissions regulations.

FCA has highly profitable businesses in North America with its RAM trucks and Jeep brand, but lost money during the last quarter in Europe, where most of its plants are running below 50 percent 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 US business.

A deal would do little, however, to address both companies' limited presence in China, the world's biggest auto market.

It would also create the challenge of managing a large number of brands, from high-end Maseratis to budget Dacias.

The huge cost of countering disruptive new entrants such as Tesla's electric cars or future autonomous vehicles from Uber and Google has pushed other automakers to collaborate, 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 longstanding boss Sergio Marchionne made constructive talks impossible before Marchionne's sudden death last July, banking sources said.