Innogy, SSE agree on UK retail merger in sector shakeout

FRANKFURT/LONDON (Reuters) - German energy group Innogy and British peer SSE on Wednesday agreed to merge their retail activities in Britain, kicking off what is expected to be the sector's biggest shakeout in years.

The announcement comes a day after both groups said they were in talks about such a step, which would create a challenger to Centrica's British Gas as the country's largest power supplier.

Large energy retailers have bled market share to smaller and cheaper rivals and also face a cap on retail prices proposed by the British government, making it hard for the established players to earn a decent margin.

"When we look at the competitive landscape and the uncertain political environment for energy retailers in Great Britain, it is clear that Npower would be better placed to offer value to our customers and our shareholders as part of a new company," Innogy Chief Executive Peter Terium said in a statement.

SSE will hold 65.6 percent of the new entity, which will consist of Innogy's Npower and SSE's retail customer business and will be listed on the London stock exchange, while Innogy will hold the remaining 34.4 percent.

Analysts have voiced concern about whether the move will get approval by antitrust authorities as well as potential problems about the combination of Innogy's and SSE's IT platforms, which according to Bernstein run on two different systems.

SSE's business retail and Ireland operations will not be included in the combined company, both groups said. Innogy will receive a 60 million pounds ($79 million) break fee if SSE fails to get approval for the move by July 31, 2018.

($1 = 0.7602 pounds)

(Reporting by Christoph Steitz and Susanna Twidale; Editing by Maria Sheahan)