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UPDATE 5-Innogy shares surge after German utilities 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

* RWE came close to deal with Iberdrola before Christmas (Adds comments from RWE's largest shareholder, shares)

ESSEN, Germany, March 12 (Reuters) - Plans to carve up Innogy between parent RWE and rival E.ON added 4.3 billion euros ($5.3 billion) to the market value of Germany's three largest energy utilities on Monday.

Germany's power companies are reshaping as they look to boost green energy output, shift away from fossil fuels and prepare for Germany's exit from nuclear power in 2022.

The changes will turn RWE into one of Europe's largest renewable players and at the same time create one of the continent's top grid and energy retail groups under the aegis of E.ON.

"Overall, we view the planned transaction between RWE AG and E.ON SE as positive, from a strategic as well as a financial point of view," municipal shareholders in RWE, which together hold about 23 percent in the group, said.

"We think that this transaction gives significant thrust to the successful implementation of Germany's energy shift."

Before striking a deal with E.ON, RWE held talks with European peers Enel and Engie and came close to a deal with Spain's Iberdrola before Christmas, people familiar with the matter said.

Shares in Innogy closed up 12.1 percent at 38.70 euros 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 RWE has already explored alternative deals with other candidates.

RWE is being advised by Bank of America Merrill Lynch and Citi on the deal, E.ON has hired Perella and BNP and Goldman Sachs is working for Innogy, the people said.

SYNERGIES

In a letter to staff seen by Reuters, interim Chief Executive Uwe Tigges said 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," said Tigges, who has been in the role for only three months.

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.

Frank Bsirske, head of the Verdi labor union and deputy chairman of RWE's supervisory board, welcomed the deal, saying it offered good prospects for growth and jobs. RWE's supervisory board will meet later on Monday.

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

Innogy and E.ON have large overlapping retail businesses in Germany, Britain and the Czech Republic, with analysts at Bernstein expecting most of the synergies, which they put at about 500 million euros, to be realized there.

Shares in RWE, which owns 76.8 percent of Innogy, closed 9.2 percent higher while E.ON's ended the day up 5.4 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.

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 = 0.8121 euros)

(Additional reporting by Arno Schuetze in Frankfurt, Dasha Afanasieva in London, Vera Eckert in Essen and Anneli Palmen in Duesseldorf; Editing by Alexander Smith and Keith Weir)