* RWE, Engie studying options with bankers, advisers
* No investment bank mandates given, CEOs not in talks
* Possible deal must wait for German election in September
* Franco-German "Airbus-style" energy alliance idea revived
(Adds broker comments, political background)
By Arno Schuetze, Geert De Clercq and Julien Ponthus
FRANKFURT/PARIS, May 19 RWE and Engie
are studying a possible share swap that could create
a Franco-German giant in power grids, renewables and energy
services with a market value of about 50 billion euros ($55.8
An Engie-RWE alliance would represent a breakthrough as the
first truly cross-border utility in Europe since the EU began
pushing for a single energy market decades ago.
Options being looked at could involve RWE swapping part or
all of its majority stake in renewables and grids firm Innogy
in exchange for a minority stake in Engie, four
investment banking sources told Reuters.
No active talks between the top executives of the firms are
under way, but the two utilities are discussing options and
scenarios with advisers and bankers, the sources told Reuters.
At this stage, no banks have been given a formal mandate.
"There are indeed talks ongoing, but that does not mean they
will succeed," a French government source said.
An RWE-Engie deal could form the basis of a Franco-German
"Airbus of energy" industrial alliance which was proposed by
former French President Francois Hollande.
As long ago as February 2014, a joint French-German cabinet
meeting in Paris discussed ways in which the two nations could
cooperate in renewable energy and power grids, but overcapacity
among European utilities dampened enthusiasm for mergers.
New French President Emmanuel Macron is keen to promote
close ties with Germany and visited Berlin this week.
RWE shares traded 4.6 percent higher at 1435 GMT, while
Innogy shares were up 3.8 percent after rising more than five
percent. Engie shares initially rose 1.2 percent, then pared
their gains to stand 0.6 percent higher.
French EDF has a large presence in Italy, while units of
RWE, fellow German utility EON and Spain's Iberdrola
are among the UK's "Big Six" utilities. However, these
firms are all still mainly national players who have secondary
interests in other countries.
An Innogy deal would make Engie a big player in Germany and
Britain, where it has only a small presence, and strengthen CEO
Isabelle Kocher's focus on grids and renewables.
Investors are warming to German utilities after a deal was
struck with the government over storage liabilities as Germany
ditches nuclear power.
Germans might be less enthusiastic about throwing in their
lot with Engie. About 23 percent of RWE is held by municipal
shareholders, who might fear that RWE would make ill-fated
foreign investments, like E.ON did, and lose more influence
"We struggle to see how swapping a majority stake in a
stable, largely regulated German company which is well
understood by the current management, for a minority stake in a
part-state owned French utility, would enhance the stability and
visibility of the dividend payment," Jefferies said in a note.
Brokerage Bryan Garnier said that while at first sight
Innogy could fit perfectly with Engie's businesses, Engie's M&A
track record is unimpressive as it has reported more than 10
billion euros goodwill impairments since 2008.
"In all and in the absence of further details, we believe
that such a tie-up would be negative for Engie," it said.
Bankers said that any combination would have to wait for
German elections in September, although one added that since the
deal would not involve any plant closures and enhance
French-German industrial cooperation, things could move very
A spokeswoman for Engie declined to comment but reiterated
that CEO Kocher - following a Bloomberg report in March about
Engie weighing a bid for Innogy - had said that Engie had no
plans for a transformative deal.
Innogy, RWE and Germany's economy ministry declined comment.
One scenario that has emerged would see RWE swap part or all
of its 76.79 stake in its listed unit Innogy for a direct
minority stake in Engie. RWE spun off Innogy last October.
Bankers said that because of the strong undervaluation of
RWE shares, a transaction could only take the form of an asset
swap, not a cash deal. A certain cash component could be an
option to adjust for differences in valuation.
RWE's stake in Innogy - whose market cap was 18.6 billion
euros at the Thursday close - is worth about 14.3 billion, but
RWE's own market capitalisation is just 9.6 billion, which means
that all its other coal, nuclear and other energy assets are
effectively assigned a negative value by the market.
Engie's market value was 32.8 billion euros at the same
One banker said that swapping its Innogy stake into that
unit could give RWE a stake of up to one third in the new group.
Bankers say that any transaction would have to ensure a
balance of power between RWE and the French state.
With the value of the French state's 28.65 percent stake in
Engie at just under 10 billion euros, an asset swap involving
all of Innogy could dilute French state holding company APE's
Engie stake to about 20 percent in Engie-Innogy.
One banker said that RWE could contribute less than its
entire stake in Innogy in a deal that would give RWE and the
French state equal stakes.
This would require a law change in France, as the government
is legally required to hold a one third stake in Engie. Bankers
said this is unlikely to be a problem for the new Macron
($1 = 0.8955 euros)
(Additional reporting by Tom Kaeckenhoff, Christoph Steitz and
Markus Wacket in Frankfurt and Emmanuel Jarry in Paris; Writing
by Geert De Clercq; Editing by Jason Neely and Keith Weir)