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UPDATE 3-German power firm Innogy boosted by latest utility shake-up

* RWE, E.ON to break up Innogy

* Innogy to comment on RWE/E.ON deal in due course

* Innogy, RWE, E.ON shares all up

* Deal offered 16 percent premium at Innogy's Friday close (Recasts, adds internal letter, shares)

ESSEN, Germany, March 12 (Reuters) - Plans to carve up Innogy between parent RWE and rival German utility E.ON drove its shares sharply higher on Monday, lifting the combined value of the three German energy firms by 5.7 billion euros ($7 billion).

The move to divide up Germany's largest energy firm by market value is part of sweeping changes by utilities trying to boost green energy, manage a shift from fossil fuels and prepare for a 2022 nuclear power exit.

Shares in Innogy were up 13.8 percent to 39.28 euros at 1025 GMT after Sunday's proposed deal from RWE and E.ON, which plans to offer Innogy's minority shareholders 40 euros per share, or 5.2 billion euros, a 16 percent premium to Friday's close.

Two bankers who have worked on previous Innogy deals put the chances of a rival bid for the German energy company as "very low" to "zero," since Innogy has already explored alternative deals with other candidates.

In a letter to staff seen by Reuters, Chief Executive Uwe Tigges said that Innogy's management and supervisory boards would thoroughly assess the planned deal, which was agreed in principle and still requires antitrust approval.

"We assure you that the interests of the employees of our company as well as those of our shareholders continue to be our primary focus," Tigges said.

Germany's cartel office said it was too early to comment on possible hurdles in the planned asset swap deal. The deal is expected to involve German and European antitrust regulators.

Innogy and E.ON have large overlapping retail businesses in Germany and Britain.

RWE, which owns 76.8 percent of Innogy, saw its shares gain as much as 14 percent and E.ON was up 6 percent. Their proposed transaction comes just two years after RWE spun off its renewable, retail and network operations to form Innogy and E.ON split off some of its business to create Uniper.

However, Innogy, which reported its annual results on Monday, said that it had so far not reflected on the proposal and would comment at a later stage.

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.

"A win-win?" Morgan Stanley suggested in a note, reiterating its "in-line" view of the industry.

If approved, the deal would spell the end for Innogy as a standalone company. It has been in turmoil since former Chief Executive Peter Terium resigned in December and on Monday said it would cut 400 million euros in costs through the end of 2020.

Analysts at Jefferies said while helping E.ON achieve scale and efficiencies in networks and retail, and transforming RWE into a leading renewables and security of supply provider, a deal "would involve another two years in costly restructuring."

Innogy reported a 3 percent rise in 2017 adjusted operating profit and said it would propose a dividend of 1.60 euros per share for 2017, unchanged from a year earlier. ($1 = 0.8113 euros)

(Additional reporting by Arno Schuetze in Frankfurt, Dasha Afanasieva in London and Anneli Palmen in Duesseldorf Editing by Jason Neely and Alexander Smith)