By Maki Shiraki

TOKYO (Reuters) -Honda and Nissan are likely to unveil on Monday a pact to explore a merger by setting up a joint holding company, a person familiar with the matter told Reuters, with the aim of reaching a deal by June 2025.

The consolidation would create the world's third-largest auto group by vehicle sales after Toyota and Volkswagen as legacy carmakers face growing challenges from Tesla and Chinese rivals.

Honda, Japan's second-biggest automaker after Toyota, has a market capitalisation of more than $40 billion, while third-ranked Nissan is valued at about $10 billion.

The automakers said they will hold a joint press conference on Monday at 0800 GMT where their chief executives would be joined by the head of Nissan partner Mitsubishi Motors.

The press conference will take place after the companies convened board meetings earlier on Monday, according to the person familiar and a second source.

The sources spoke on condition of anonymity because the information was not public.

Honda and Nissan aim to finalise the deal by June 2025 and set up a holding company in August 2026, when its shares will be listed while Honda and Nissan would delist, the person familiar with the matter said.

Honda will appoint the majority of the holding company's board, including its leader, the person added.

The integration of the two storied Japanese brands would mark the biggest reshaping in the global auto industry since Fiat Chrysler Automobiles and PSA merged in 2021 to create Stellantis in a $52 billion deal.

Combining Mitsubishi Motors would take the Japanese group's global sales to more than 8 million cars. The current No. 3 group is South Korea's Hyundai and Kia.

Honda and Nissan have been exploring ways to bolster their partnership, including a merger, Reuters reported last week.

The two companies said in March they were considering cooperation on electrification and software development. They agreed to conduct joint research and widened the collaboration to Mitsubishi Motors in August.

Last month, Nissan announced a plan to cut 9,000 jobs and 20% of its global production capacity after sales plunged in the key China and U.S. markets. Honda also reported worse-than-expected earnings due to declining sales in China.

Like other foreign carmakers, Honda and Nissan have lost ground in the world's biggest market China amid the rise of BYD and other local brands that make electric and hybrid cars loaded with innovative software.

In a separate online press conference with the Foreign Correspondents Club of Japan on Monday, former Nissan Chairman Carlos Ghosn said he did not believe the Honda-Nissan alliance would be successful, saying the two automakers were not complementary.