The French automaker said Monday that it would "study with interest" a proposal from Fiat Chrysler that would give its shareholders 50% ownership of a combined business with annual vehicle sales of 8.7 million.
If completed, the merger would create the world's third largest carmaker behind Volkswagen (VLKAF) and Toyota (TM). General Motors (GM) would fall to fourth in the global rankings.
Renault (RNLSY) stock surged more than 15% in Paris on Monday, while Fiat Chrysler shares jumped around 11% in Milan.
The companies had been discussing ways to cooperate on products and new technologies, but Fiat Chrysler said in a statement outlining its proposal that more could be gained from a merger.
"These discussions made clear that broader collaboration through a combination would substantially improve capital efficiency and the speed of product development," the Italian-American company said.
Fiat Chrysler owns brands including Jeep, Dodge, Alfa Romeo and Maserati. Among its top markets is North America, where Renault does not have a significant presence.
The proposal is the latest example of established automakers seeking partnerships to share the costs of developing new technologies including electric vehicles and autonomous driving systems.
German carmakers BMW (BMWYY) and Daimler (DDAIF) have formed a joint venture that will develop ride-sharing and charging services. Ford (F) and Volkswagen are working together to develop some new vehicles.
The trend toward cooperation has accelerated in recent months as carmakers are under increased pressure from electric-car upstarts like Tesla (TSLA) and tech companies including Uber (UBER).
Fiat Chrysler said a merger with Renault would produce annual cost savings of more than €5 billion ($5.6 billion). The company said no plants would be closed as a result of a merger.
Fiat Chrysler was formed as a merger of two struggling automakers. Fiat bought a controlling stake in a Chrysler out of bankruptcy following the US government bailout of the company in 2009. They were formally merged in 2014.
But Fiat Chrysler is a distant fourth in US sales and 8th globally. The company has also trailed its competitors in adopting electric vehicle and self-driving technology, which many deem the industry's inevitable future.
Sergio Marchionne, its former CEO who passed away a year ago, had spoken openly of the need to merge Fiat Chrysler with a larger automaker to give it the scale and resources to compete. He had even sought a merger with General Motors, only to be rebuffed. He had been far more blunt than other auto executives about the threat to the industry that new entrants such as Google (GOOGL) posed to old-line automakers.
Renault is already a member of the world's biggest automotive alliance with Japanese carmakers Nissan (NSANF) and Mitsubishi Motors.
It's not clear how a merger with Fiat Chrysler would affect that alliance, which was thrown into turmoil following the arrest last year of its former leader Carlos Ghosn.
Renault holds a 43.5% stake in Nissan, while Nissan owns 15% of Renault. The French carmaker, which sells fewer cars than its Japanese partner, had been pushing for the companies to merge but was rebuffed.
While the relationship between Nissan and Renault has been strained following Ghosn's arrest, adding Fiat Chrysler would increase the alliance's annual vehicle sales to 15 million.
Renault and Fiat Chrysler both said Monday that a merger would benefit the alliance. Nissan and Mitsubishi Motors declined to comment.
Regulators are likely to scrutinize any deal between Fiat Chrysler and Renault. The French government, which owns 15% of Renault, indicated that it would support a merger if the companies protect French jobs and auto plants.
"I want this deal to take place within the framework of the alliance between Renault and Nissan," French finance minister Bruno Le Maire said in a radio interview on Tuesday.
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