Shares in Mitsubishi Motors Corporation (MMC) soared more than 20% on Thursday after the Nikkei business daily reported PSA Peugeot Citroen was in talks to spend up to JPY300bn (US$3.4bn) to acquire a 30-50% stake in the Japanese automaker. PSA itself would confirm only it had "started discussions with Mitsubishi Motors Company (sic) concerning the possibility of extending their relationship".

The stock was up 21% at JPY144, after climbing as much as 22.7% at one stage, Reuters reported.

In a statement, the French automaker said it had "developed successful cooperations with [MMC] in three areas in recent years".

These are the product development cooperation and model sharing deal under which MMC builds rebadged versions of its Outlander mid-size crossover for PSA to sell as the Peugeot 4007 & Citroen C-Crosser using some PSA-made engines; a venture developing lean technologies for electric vehicles; and a joint venture vehicle assembly plant in Kaluga, Russia.

"PSA Peugeot Citroen confirms that it has started discussions with Mitsubishi Motors Company concerning the possibility of extending their relationship which could lead to a strategic partnership," it said in the statement without elaborating.

However, the Nikkei said PSA was set to take control of MMC which was rocked several years ago by recall scandals in Japan and financial problems arising from a promotion offering cut-rate credit to sub-prime-rated customers in the US.

Its October global production was down 29.6% year on year and its year-to-date sales in the US were off 46.5% to 49,631 units at the end of November, according to WardsAuto.com data.

At the end of October, MMC announced a first fiscal half operating loss of JPY32.5bn, JPY57.9bn down from a year ago, saying a drop in sales volume and the strong yen overcame cost cuts. The net loss of JPY36.4bn yen was down JPY49.2b n on last year's net profit. Sales fell 53% to JPY573bn.

MMC booked a group net loss of JPY54.88bn for fiscal 2008 to 31 March this year, on sales of 1.97 trillion yen, down 26.4% year on year due to a sales slump and higher yen.

"It is only the start of discussions," a Peugeot spokesman told AFP on Thursday, refusing to confirm the talks were dealing with the automaker taking a stake in Mitsubishi.

Peugeot's chairman Philippe Varin - who has said it is "essential" for the group to significantly raise its presence in emerging markets - has indicated that he has not ruled out "capital alliances," the spokesman added.

Were they to come together, Peugeot and Mitsubishi would be the world's sixth-largest automaker, based on their total sales of 4.45m vehicles last year, AFP said.

"We are discussing possible projects that could be beneficial to both companies. A capital tie-up is one of the options," Mitsubishi spokesman Kai Inada told AFP in Tokyo, stressing nothing had been decided on whether they would go ahead with a capital alliance.

The Nikkei said Peugeot was in the final stages of talks with Mitsubishi to effectively take over the Japanese company after the first-half net loss equivalent to just over US$400m. Reuters cited the paper as saying PSA might take a 30-50% stake for up to JPY300bn ($3.4bn).

Mitsubishi may also potentially buy an interest in Peugeot, the paper added.

The Nikkei added that top management at Mitsubishi were ready to accept a majority acquisition of the company by Peugeot if conditions were right.

"This partnership would further enhance relations between the two automakers," wrote IHS Global Insight auto analyst Ian Fletcher in a note.

"It would provide PSA Peugeot-Citroën with greater access to Mitsubishi's research and development capabilities and could allow it to secure a stronger foothold in the North American and Asian markets, while for Mitsubishi it would increase its long-term security."

"For Mitsubishi Motors, Peugeot would be the ideal partner," Okasan Securities auto analyst Yasuaki Iwamoto told the news agency.

"It would be tough for Mitsubishi to shoulder R&D costs for environmental technologies on its own and, if you look at the global auto industry, there is a limited pool of partners to choose from."

CM-CIC analyst Guillaume Angue said in a note the alliance would make sense from an industrial viewpoint and it would allow Peugeot to solve its problems of size, but it would come a bit early in the business cycle.

Mitsubishi remained expensive with an enterprise value to sales ratio of 0.64 against 0.2 at Peugeot, he said.

Peugeot's interest in Mitsubishi Motors, ranked seventh of Japan's eight carmakers by January-October production, is in line with the recent push by new chief executive Philippe Varin to create a more global car company, Reuters noted.

Varin, who took up the role in June, has said this could be achieved through various means including forming alliances with other carmakers.

Both Peugeot and Mitsubishi have so far attempted to compete with bigger rivals through non-equity tie-ups, even as others sought deeper alliances to weather the slump brought on by the global downturn.

These include Fiat taking control of Chrysler, General Motors' attempts to shed several of its brands.

Peugeot itself has operational ties with several rival carmakers including Ford (engine Jvs), Toyota and BMW.

Reuters said Peugeot, ranked eighth in the world by sales volume last year, would face increased competitive pressure from domestic rival Renault which is looking to increase ties with 10-year equity 'Alliance' partner Nissan Motor in an alliance planing to lead the industry in the unproven electric car segment, where Mitsubishi Motors is among the only players to have a car on sale.

The deeper talks with Peugeot mark a reversal of Mitsubishi Motors' attempt to go it alone with the backing of the powerful Mitsubishi group, since dissolving its equity ties with the former DaimlerChrysler group in 2005.

That move split MMC away from the then-troublesome  Mitsubishi Fuso truck and bus unit which had been hit by a recall scandal in Japan. The unit is now part of Daimler's global truck group.

MMC had been counting on strong growth at its Russian operations - which it split from its European unit to report direct to head office in Japan several years ago - and in China to lead a recovery, but that strategy failed with the collapse (down about 60% by volume) of the Russian market this year.

"It's good news for Mitsubishi Motors," said Yoshihiko Tabei, chief analyst at Kazaka Securities in Tokyo.

"While Mitsubishi Motors still faces other challenges, such as the reorganisation of its domestic sales network and production bases in North America, a Peugeot deal would be positive for its EV (electric vehicle) business."

Mitsubishi Motors plans to use the money raised through the stake sale to buy back preferred shares issued to Mitsubishi UFJ Financial Group, Mitsubishi Heavy Industries, and other Mitsubishi companies, the Nikkei said, according to Reuters.

While a new share issuance could be authorised at a board meeting, given that Peugeot would gain management control, Mitsubishi would seek approval for the deal at a shareholders meeting to be held in June, the Nikkei added.

Separately, sources "close to the matter" told Japan's Kyodo News agency might invest up to hundreds of billions of yen in MMC.

The negotiations are on the premise that Peugeot will buy new shares of Mitsubishi Motors through a third-party allocation, with the exact amount of investment and timing to be determined, the sources said.

It would be the first major capital alliance between Japanese and foreign automakers since Nissan Motor and Renault agreed their capital tie-up in 1999, Kyodo noted.

Under their latest partnership, the two firms are considering jointly developing next-generation, environment-friendly cars, according to the news agency's sources.