November 20, 2017 / 2:49 PM / a year ago

UPDATE 1-RWE rallies on hopes for Innogy deal, less strict German climate policy

* RWE, Enel have held talks about Innogy - sources

* Deal could see Enel unit invest in Innogy, RWE in Enel

* End of German coalition talks may mean slower coal exit (Adds fund manager comment, background)

FRANKFURT, Nov 20 (Reuters) - Shares in German utility RWE rallied on Monday on renewed investor hopes of a deal for its Innogy unit and on expectations of a less stringent climate policy following the failure of coalition talks in Germany.

RWE wants to cut its 16.8 billion euro ($19.8 billion) stake in retail business Innogy, possibly involving a deal with Italy’s Enel, 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 2.3 percent in a flat Germany market at 1421 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 to close coal-burning power plants, a threat that weighed on RWE’s share price this month.

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

Analysts from Goldman Sachs said on Monday they saw potential for RWE’s price to rise, citing compensation payments for early plant closures, an expected increase in power prices and merger and acquisition (M&A) related valuation for Innogy.

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

Enel could use its Spanish unit Endesa to buy about a third in Innogy, a source said, triggering a bid for the whole group under German takeover rules. RWE could swap another third for shares in Enel or an Enel unit, the source said.

Union Investment, which has invested in RWE and Innogy, said RWE’s management had suggested it could sell smaller Innogy stakes to buy other assets and diversify, while making sure investments do not weigh on margins.

“A shareholding in Enel would internationalise the company towards southern Europe,” fund manager Thomas Deser said.

A banker familiar with the industry said gaining access to southern Europe would countries would give Innogy a presence in a region that has large potential for renewable energy.

$1 = 0.8493 euros Reporting by Arno Schuetze and Tom Käckenhoff; Editing by Jason Neely and Edmund Blair

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