Split from RWE, Innogy struggles to make headway on market debut

* Shares (Berlin: DI6.BE - news) slip below issue price of 36 euros

* Reflects stable nature of business

* Share (LSE: SHRE.L - news) price gives Innogy market cap around 20 bln euros

* RWE (LSE: 0FUZ.L - news) still holds three-quarters of Innogy (Adds CEO comment, context, updates shares)

By Christoph Steitz

FRANKFURT, Oct (HKSE: 3366-OL.HK - news) 7 (Reuters) - Shares in Innogy, comprising the healthier assets of struggling power group RWE (Amsterdam: RW6.AS - news) , slipped below their issue price on their stock market debut on Friday, reflecting the limited growth potential for its businesses.

With (Other OTC: WWTH - news) proceeds of 5 billion euros ($5.58 billion), Innogy is Germany's largest stock market listing since Deutsche Post (LSE: 0H3Q.L - news) went public in 2000.

Innogy faces challenges, including a pending decline in returns in grid fees, rising competition in its renewable business and problems at its British npower unit.

While giving investors exposure to regulated power and gas networks, which account for two third of its profits, growth rates in its business are below 10 percent and likely to remain that way.

"We don't see Innogy as a growth story but a dividend title with relatively stable and visible earnings," DZ Bank analyst Werner Eisenmann said.

The stock started trading at 37.30 euros, above an issue price of 36 euros, but fell as low as 35.71 euros in early business. They stood at 35.87 euros at 1252 GMT, while RWE, which still holds three-quarters of Innogy, was down 6 percent.

Innogy is valued at 20 billion euros, more than double RWE's current market capitalisation as Innogy investors no longer have to factor in RWE's costs related to the storage of radioactive nuclear waste.

"We are very very satisfied. It's good for the finances of Innogy, it's good for the finances of RWE," Innogy Chief Executive Peter Terium told Reuters TV.

In a sign that the company was able to attract large interest from investment funds focused on long-term investments, about half of the shares were sold to the top ten subscribers, according to a person close to the deal.

CASH BOOST

Of the 5 billion euros in total IPO proceeds, 2 billion will be spent on Innogy's future, most notably the maintenance and expansion of its power and gas grids as well as renewables. The rest will go to RWE, which suffers under a 28.3 billion euros debt pile.

Rival E.ON last month spun off its power plant and energy trading business Uniper as a separate entity with its own market listing.

With a planned payout ratio of 70-80 percent of adjusted net income and an expected dividend yield of 4-5 percent, Innogy beats placing cash in a bank account due to the European Central Bank's zero interest rate policy.

"We see the market moving towards a dividend valuation approach for Innogy based on the dearth of German infrastructure companies," analysts at Macquarie said in a note, rating the shares as "outperform".

"A 4 percent implied dividend yield for Innogy over 2016-20 would imply a 46 euro/share valuation," it added.

The listing follows years of falling profits at RWE's conventional power generation unit, its core business, which has come under intense pressure from renewables and a steep decline in wholesale prices.

This has led investors to dump German utility stocks and slap major discounts on them. Investors are also concerned at the potential costs of storing radioactive waste after the country's last nuclear power plants go offline in 2022. ($1 = 0.8966 euros)

(Additional reporting by Alexander Huebner and Arno Schuetze; Writing by Maria Sheahan; Editing by Harro ten Wolde and Adrian Croft)