It will also mean that RWE will end up with a large stake in Eon.
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.
"This looks like an advantageous step for E.ON at first glance", said Thomas Deser, fund manager at Union Investment, which holds shares in E.ON, RWE and Innogy.
"Each company will have a stronger entrepreneurial core". RWE and E.ON, whose share prices collapsed over the past decade, rose 11 and 4.6 percent respectively. Chancellor Angela Merkel welcomed the deal and said she had faith in Germany's utilities to find the best way to adapt to the country's energy shift dubbed Energiewende.
And the deal could see the creation of a new European renewables giant.
Under the agreement, Eon would receive RWE's 76.8% stake in innogy in return for granting RWE an effective participation of 16.67% in Eon SE.
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. As a result, it does not believe the E.ON deal with RWE will affect its own merger. The deal is expected to close in late 2019.
FILE PHOTO: Innogy logo in Essen, Germany, March 14, 2017.
Innogy and E.ON have large overlapping retail businesses in Germany and Britain.
Furthermore, E.ON would transfer to RWE the minority interests in RWE-operated German nuclear power plants, the innogy gas storage business and its stakes in the Austrian utility Kelag, the statement said.
RWE said its plan is to combine the renewables businesses of Innogy and E.on to establish a greener utility with a broadly diversified portfolio of renewable and conventional power generation assets, which would be linked via its existing trading business.