YOKOHAMA, Japan— Nissan Motor Co. said Thursday that it would bet more than $2 billion that Mitsubishi Motors Corp. can recover from a scand...
In return, Nissan will get a controlling 34% stake in the struggling auto maker that has admitted to manipulating data to inflate mileage results for some of its cars.
The deal is the latest example of car makers working together in an increasingly competitive industry. By teaming up, rivals hope to slash steep development costs and jointly invest in the new technology necessary to meet tightening emission standards and fend off challenges from Silicon Valley upstarts.
For Carlos Ghosn, chairman and chief executive of the Renault-Nissan Alliance, the investment is a vote of confidence in Osamu Masuko, his counterpart at Mitsubishi Motors.
Mr. Ghosn said Mr. Masuko kept him up-to-date in closed-door meetings on the scope of the problems at the company. “When he says this is the size of the problem, we trust him,” Mr. Ghosn said.
The move will incorporate Mitsubishi into the existing 17-year-old alliance between Nissan and Renault SA of France.
Mitsubishi will remain a separate brand, with its own network of dealers, and Nissan won’t be involved in day-to-day operations, the two companies said.
Nissan will send engineers to Mitsubishi’s vehicle-development team, which the company has singled out as the department at the source of the falsification of fuel-economy data.
Japan's Mitsubishi Motors failed to issue a forecast for the current financial year on Wednesday, citing uncertainties as the scandal over fuel-economy manipulation deepens.
The companies also plan to jointly develop new cars together. Mitsubishi hopes to tap into Nissan’s global network of factories to grow in more markets, such as the lucrative U.S., where Mitsubishi has only a small presence. Nissan wants a bigger share of Southeast Asia, where Mitsubishi has had more success.
The deal also catapults the Renault-Nissan alliance into a rarefied stratosphere of the world’s biggest car makers. Renault-Nissan and Mitsubishi sold a combined 9.6 million vehicles world-wide in 2015, data from each of the companies showed. That is close to the roughly 10 million vehicles that Toyota Motor Corp., Volkswagen AG and General Motors Co., the world’s three biggest auto makers, each sell in a year.
Mr. Ghosn called the deal a “potential win-win” for both companies, but the risks are proportional to the benefits, analysts say.
Mitsubishi’s sales are declining while its costs are ballooning as a result of admitting in April to falsifying data relating to fuel economy on at least four minicar models sold in Japan. Two of the models were manufactured by Mitsubishi and sold under Nissan’s brand name.
“Mitsubishi could post losses as its domestic operations suffer. If recovery is not in sight, that could also impact Nissan’s earnings,” said Koji Endo, an automotive analyst at Advanced Research Japan.
Mitsubishi and Nissan earlier estimated a combined ¥270 billion ($2.5 billion) in costs related to the fuel economy scandal, a person familiar with the matter said.
Nissan isn’t leaping into the ¥237.4 billion deal blindly. Its investigators are leafing through Mitsubishi’s books, and the deal is contingent upon them not finding anything surprising, Mr. Ghosn said. The companies hope to have the deal done by May 25.
Shares in Mitsubishi closed up 16% after news of a possible deal emerged earlier Thursday. Nissan shares fell 1.4%.
Mitsubishi’s struggles after the revelations about falsified fuel-efficiency tests accelerated what it says was an inevitable alliance between the two companies, which have been working together on minicar development and manufacturing since 2011.
“While the fuel-economy problem has accelerated our talks, I believe we would have taken this path anyway,” Mr. Masuko said.
The deal also marks a step-back for the Mitsubishi group, which had been the largest shareholder—and a source of a previous bailout for Mitsubishi Motors.
Mitsubishi Motors will issue new shares to Nissan. That means Mitsubishi Heavy Industries Ltd., Mitsubishi Corp. and Bank of Tokyo-Mitsubishi UFJ Ltd. will see their combined holding in Mitsubishi Motors fall to about 20% from 34% currently, Mr. Masuko said.
A spokesman at Bank of Tokyo-Mitsubishi UFJ said it viewed the planned alliance positively. “We hope it will lead to solutions to their problem,” he said.
The Mitsubishi group companies rescued Mitsubishi Motors back in 2004 by purchasing preferred shares after the car maker’s partnership with DaimlerChrysler fell apart. The auto maker paid back the group companies roughly two years ago.
Under Japanese law, shareholders owning more than one-third of a company’s stock get veto power on management decisions. Nissan will appoint the chairman of the Mitsubishi Motors board and one-third of the board seats, Mr. Ghosn said.
The deal will require approval from Japanese antitrust regulators, Mr. Ghosn said.
Nissan also announced on Thursday its full-year results for the year ended in March. The company posted a net profit of ¥523.8 billion, up 14% from ¥457.6 billion a year earlier, after solid sales in the U.S. and China offset slowdowns in emerging markets. It expects to post a net profit of ¥525 billion during the current financial year.
—Atsuko Fukase contributed to this article.
Write to Yoko Kubota at yoko.kubota@wsj.com and Sean McLain at sean.mclain@wsj.com
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