Proton Holdings Bhd and DRB-Hicom Bhd sign a memorandum of understanding to work towards a possible merger of their distribution networks and service centers.

The two companies tell the Malaysian Stock Exchange they are aiming for a formal definitive agreement within three months. No further details were provided.

A merger of Proton’s distribution arm, Proton Edar Sdn Bhd, with rival Edaran Otomobil Nasional Bhd (EON) would create a company with sales of more than RM2 billion ($631 million) annually.

The new entity also would manage after-sales services for the Proton brand, and allowing the auto maker to focus exclusively on manufacturing cars.

Additionally, a combined company would see better profits for distributors, who now see slim margins due to competition from EON, Proton and DRB-Hicom says in their filing.

EON, majority owned by DRB-Hicom, currently is the Malaysian distributor for Suzuki, Hyundai, Volkswagen and Audi brands. It also owns 48% of Mitsubishi Motors Malaysia Sdn Bhd and sells Mitsubishi vehicles.

Analysts say without a merger, EON and Proton Edar will be forced to shrink their dealership networks and downsize their staff to remain competitive. Proton has 250 dealers and branches, after cutting 112 last year. EON has 32 aftersales branches, 40 sales branches and 200 franchise service dealers and sales dealers.

Talk of a merger between Proton Edar Sdn and EON has resurfaced regularly since 2003.

DRB Hicom earlier this year made a general offer to acquire the 52 million shares in Eon it does not already own for MR2.10 ($0.66) each and delist the company from the Malaysian Stock Exchange. This is due to be completed in the third quarter.