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Fitch puts German utilities E.ON, innogy on rating watch negative over RWE deal

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Fitch puts German utilities E.ON, innogy on rating watch negative over RWE deal

Fitch Ratings placed German utility companies E.ON SE and Innogy SE on rating watch negative after the former agreed to a multibillion-euro asset swap with RWE AG.

Under the deal, E.ON would buy RWE's 76.8% stake in innogy and then make a public takeover offer in cash for the remaining ownership in innogy. RWE would gain a 16.67% interest in E.ON, along with generation assets from E.ON and innogy.

The transaction, which is seen to overhaul Germany's utility sector, is expected to close at the end of 2019.

Fitch said the deal could put pressure on E.ON's balance sheet because the company would assume most of innogy's debt, which amounted to €16.4 billion at the end of 2017.

"The scale of re-leveraging is the key concern for us, which triggered placing all the ratings on [rating watch negative]," Fitch said, noting that E.ON's earnings are also expected to increase after the acquisition.

Fitch projected E.ON's EBITDA to increase to about €8 billion following the deal from €5 billion in 2017. The debt watcher also estimated synergies of about €600 million.

E.ON's and innogy's long- and short-term issuer default ratings of BBB+ and F2, respectively, and senior unsecured ratings of A- were placed on rating watch negative.

"We are likely to align innogy's ratings with E.ON's and, as a result, placed them on [rating watch negative] following the same rating action for E.ON," Fitch said.

Meanwhile, RWE's long-term issuer default rating and senior unsecured rating, which were both BBB, were placed on rating watch evolving.