RWE rallies on hopes for Innogy deal, less stringent German climate policy

FRANKFURT (Reuters) - Shares in German utility RWE (RWEG.DE) rallied on Monday on renewed investor hopes for a deal for its Innogy (IGY.DE) unit as well as on expectations of a less stringent climate policy following the failure of coalition talks in Germany.

RWE is looking at ways to cut its 16.8-billion euro (£14.9 billion) stake in retail business Innogy (IGY.DE) and one option involves a deal with Italy's Enel (ENEI.MI), Reuters reported at the weekend.

Despite having no immediate need for cash, RWE has recently held talks with Enel, Europe's largest utility by market value, according to a person familiar with the matter.

RWE shares were up 3.1 percent on Germany's DAX market (.GDAXI) , which was off 0.34 percent at 0945 GMT. Investor sentiment was also helped by expectations that the collapse of talks to form a government in Germany could lead to a more lenient outcome for RWE.

The Greens, which had been expected to be part of a new German government, have been pushing for the closure of coal-burning power plants. That threat has weighed on RWE's share price this month.

"The plant closures will likely be delayed," one trader said.

Analysts from Goldman Sachs said in a note on Monday that they see large potential for RWE's price due to factors such as compensation payments for early plant closures, an expected increase in power prices and an M&A related valuation for Innogy.

A possible deal with Enel is the latest scenario for Innogy after sources earlier this year said RWE and France's Engie (ENGIE.PA) had studied a share swap under which RWE would trade part or all of its stake in Innogy for a minority stake in Engie.

(Reporting by Arno Schuetze; editing by Jason Neely)