RWE's options to exit Innogy include deal with Enel - sources

By Andrés González, Arno Schuetze and Stephen Jewkes

MADRID/FRANKFURT/MILAN (Reuters) - German utility RWE (RWEG.DE) is looking at ways to cut its 16.8-billion euro (15.00 billion pounds) stake in retail business Innogy (IGY.DE), several banking sources told Reuters, adding this could involve a deal with Italy's Enel (ENEI.MI).

RWE said last week there was no need to sell the 76.8 percent stake, given the steady dividend it gets from Innogy's networks, renewables and retail businesses that were carved out last year.

But RWE is still considering scenarios for how it can sell all or parts of it at some point and has held talks with Enel, Europe's largest utility by market value, one of the banking sources said.

RWE is being advised by Bank of America Merrill Lynch (BAC.N) on its strategic options, while Enel's advisers include JP Morgan (JPM.N), the people said.

"We have said several times that we are in talks with many participants in the market about many topics. We do not comment on market speculation," a spokeswoman for RWE said.

Innogy, Bank of America Merrill Lynch, Endesa and JP Morgan all declined to comment.

Asked about Innogy, Enel said it received pitches from investment banks as a matter of routine.

"Every time a bank brings us something to look at we receive it. But this does not mean it interests us nor that talks are under way," a spokeswoman for Enel said.

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.

One of the sources said Enel could use its Spanish unit Endesa (ELE.MC), whose 5.75 billion euro debt pile is just a fraction of its parent's 37.94 billion, as a vehicle to buy about a third in Innogy.

Under German takeover rules, this would trigger a bid for the whole group.

In a second step, RWE could use another third in Innogy to subscribe to a capital increase to be carried out by Enel, the person added.

Enel Chief Executive Francesco Starace earlier this month fuelled M&A speculation when he said Enel was "doomed" to do M&A to grow its core distribution business, which is also the key focus area of Innogy.

Asked specifically about interest in Innogy, Starace said Enel looked at everything, "but that doesn't mean we'll buy". He previously said he saw big utility deals in Europe as destroying value for shareholders.

(Additional reporting Dasha Afanasieva and Pamela Barbaglia in London, Tom Kaeckenhoff in Duesseldorf and Christoph Steitz in Frankfurt; Editing by Jane Merriman and Mark Potter)