By Christoph Steitz and Tom Käckenhoff
ESSEN, Germany (Reuters) - German energy groups E.ON (EONGn.DE) and RWE (RWEG.DE) on Tuesday fleshed out their plans to break up RWE's Innogy (IGY.DE) business, predicting higher profits and dividends as a result of a more focused corporate structure.
E.ON forecast annual operating profit to rise by an average 3 to 4 percent over the next three years, while RWE flagged a bigger than expected dividend for 2019, driving shares in E.ON to the top of Germany's blue-chip index (.GDAXI).
The two companies announced plans to carve up networks, renewables and retail energy firm Innogy, in which RWE holds a 76.8 percent stake, and divide its assets between them in a reshaping of Germany's power sector.
The deal will turn RWE, one of Europe's largest carbon dioxide emitters, into Europe's third largest renewables player after Spain's Iberdrola (IBE.MC) and Italy's Enel (ENEI.MI), with an 8 gigawatt clean power generation portfolio.
At the same time it will create Europe's largest networks and energy retail group under E.ON's umbrella, with about 50 million energy and gas clients and a regulated assets base, a key gauge of grid value, of 37 billion euros ($45.89 billion).
Germany's shift to solar and wind power after Japan's Fukushima disaster seven years ago triggered a phase-out of nuclear power, turning the coal and nuclear based business model of the country's utilities on its head.
"This is a transaction that only knows winners," RWE Chief Executive Rolf Martin Schmitz told reporters on Tuesday, also citing a 5.2 billion euro bid E.ON will launch for Innogy's minority shareholders in the second quarter.
"Critical mass is the key to success in the field of renewables energy. Before this transaction, neither Innogy nor E.ON were in such a position."
But there will be a toll in terms of lost jobs.
The deal, expected to close late in 2019, will result in as many as 5,000 job cuts as the future E.ON group targets 600-800 million euros in synergies. E.ON boss Johannes Teyssen said he was hopeful the reductions could be done without forced layoffs.
"The announced job cuts ... must be cushioned, with no compulsory redundancies," said Andreas Scheidt, a member of labour union Verdi's board. Scheidt is also deputy chairman of E.ON's supervisory board.
In an internal letter to staff seen by Reuters, Innogy's management board urged employees to remain confident in light of the uncertainty and said Innogy was not the losing party in the three-way transaction.
"There are still many open questions. It'll be our job to ask for answers in the next days, weeks and months," the board said in the letter.
Innogy, in an official statement late on Tuesday, said its board would review E.ON's offer and respond to it at the appropriate time, strongly urging shareholders to take no action and not sell their shares in the meantime.
Shares in E.ON closed more 3.9 percent higher, while Innogy's edged up 0.5 percent. RWE ended the day 2.9 percent lower, having posted bigger gains than E.ON on Monday.
"The market is pricing in the Innogy deal which results in much more focused business models," a Frankfurt-based trader said.
Under the proposed deal E.ON will focus on Innogy's gas and power networks, raising its share of profits from regulated assets to about 80 percent from 65 percent.
RWE carved out and listed Innogy in 2016, hoping to extract more value from its networks and renewables assets, the most promising areas of the crisis-ridden utility sector. It has since tried to find a buyer for its stake.
RWE said its ordinary dividend was expected to rise to 0.70 euros per share in 2018, up from 0.50 euros in 2017, with a further increase planned in 2019. Analysts polled by Reuters had expected it to remain flat.
E.ON, which also said its dividend would rise in 2018 as it released strong results on Monday, will keep some renewables assets in the Innogy deal, notably its 1.3 billion pound ($1.8 billion) Rampion wind park off southern Britain.
(Additional reporting by Vera Eckert; Editing by Alexander Smith, Keith Weir, Jane Merriman and David Gregorio)