The in-principle agreement involving huge asset swaps is part of a major restructuring of Germany's energy market as Europe's powerhouse switches from conventional to renewable power.
Morgan Stanley analysts said the proposed deal would allow E.ON to expand its networks and retail businesses, with potential for "material" cost cuts, while RWE would gain a long-term renewables strategy and a stable dividend from E.ON.
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Eon would acquire RWE's 76.8% stake in Innogy, and some other interests, with RWE taking a significant minority stake, 16.67%, in Eon's business.
The logo of German energy company Innogy at its headquarters in Essen.
The deal, still subject to antitrust clearances, would also see RWE make a cash payment of 1.5 billion euros to E.ON.
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Should the prospective deal go ahead - the acquisition still needs to be approved by European Union regulators and the companies' respective boards - it would represent a significant shift for both organisations and the German energy sector more generally.
The planned large-scale asset swap went down well with shareholders.
Share in Innogy, RWE, and E.ON all surged this morning as the markets responded positively to the news.
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The deal, which values Innogy at about 22 billion euros in equity and about 43 billion euros including debt, continues years of upheaval for competitors RWE and EON started by German Chancellor Angela Merkel's move toward an economy powered by renewable energy instead of nuclear and fossil fuels. RWE and E.ON, whose share prices collapsed over the past decade, rose 11 and 4.6 percent respectively. Uwe Tigges, chief executive officer at innogy, said it would be commenting on announcements from RWE and E.On "in due course".