March 13, 2017 / 7:55 PM / 4 months ago

RWE weighs options as utility M&A talk picks up

ESSEN, Germany (Reuters) - German utility RWE (RWEG.DE) is considering options including tie-ups with rivals and the sale of a stake in its Innogy (IGY.DE) business, its chief executive said, raising the prospect for large M&A deals in the crisis-hit sector.

"We are in regular contact with a large number of market participants. We are constantly examining all strategic options our company is faced with," RWE Chief Executive Rolf Martin Schmitz told journalists at a news conference on Tuesday to present the company's annual earnings.

His remarks follow a report by Bloomberg saying that French energy group Engie (ENGIE.PA) was weighing a bid for its networks, renewables and retail unit Innogy, in which RWE holds a 76.8 percent stake after a separate listing last year.

Shares in RWE and Innogy rose 8.7 and 7.4 percent respectively but pared gains after French BFM TV quoted a source close to Engie saying the firm had no interest in taking a minority stake in Innogy.

RWE has repeatedly said it wants to remain a majority shareholder in Innogy over the long term. RWE said on Tuesday that its supervisory board would allow it to cuts its stake to 51 percent, however.

"We have no interest in being a minority shareholder in a big company that already has a controlling shareholder," BFM quoted the source as saying.

Engie shares closed 1.4 percent lower after falling as much as 2.8 percent. Traders pointed to the possibility of wider consolidation in the sector should an Engie bid materialize.

When asked specifically about speculation that RWE could be a suitor for smaller peer Uniper (UN01.DE), spun off by rival E.ON (EONGn.DE) last year, Schmitz said: "We are examining all options. And all options means all options."

Uniper shares gained 4.4 percent.

The talk of interest in German utilities reflects efforts by RWE and E.ON to restructure after Germany's focus on promoting renewable energy virtually destroyed their established business model of selling power from fossil-fuel plants.

Engie's Aims

Analysts at Morgan Stanley said a takeover of Innogy by Engie would make sense, adding it that would give Engie access to customers in Britain, networks in Germany and raise its share of regulated profits.

Engie Chief Executive Isabelle Kocher is pushing a strategy shift to focus the former French monopoly gas utility more on grids and renewables, but she has given no indication that she wants a transformative deal.

The French company's shares are down more than 70 percent from their 2008 highs and are trading well below book value, which would make financing such a big acquisition with a capital increase very expensive.

Analysts at HSBC do not expect Engie to make a bid for Innogy, they said in a report, adding the German company's mix of assets did not meet the French group's "growth ambitions where energy efficiency and solar play a large part".

Innogy and Engie, in which the French state holds a 28.65 percent stake, declined to comment.

Innogy has a market valuation of almost 20 billion euros ($21.3 billion). Its shares listed at a price of 36 euros last October in Germany's largest listing since 2000, and traded at 35.93 euros on Tuesday.

"There should also be a positive read across for E.ON, who could be an equally attractive (and cheaper) acquisition target for Engie, if RWE were to reject its offer," Bernstein analyst Deepa Venkateswaran said.

RWE last month canceled its dividend for ordinary shares for the second year in a row, and Schmitz said on Tuesday it would not be a good idea to pay out dividends by going into debt or selling Innogy shares.

($1 = 0.9406 euros)

Additional reporting by Vera Eckert and Geert De Clercq in Paris; Editing by Keith Weir and David Clarke

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