By Tom Käckenhoff, Arno Schuetze and Christoph Steitz
DUESSELDORF/FRANKFURT (Reuters) - German energy group Innogy (DE:IGY) could sell its troubled British retail business Npower, or combine it with a local rival, four people familiar with the matter said, in a move that would end years of cost-cutting and losses.
Npower, one of Britain's big six energy retailers, has become a drag on Innogy since billing issues emerged in 2015, pushing the business into loss and leading to thousands of jobs being lost.
"Management is no longer willing to accept the losses," one of the people said, adding there were similar strategic discussions taking place at Npower's rivals. "A partnership is the only thing that makes sense."
Innogy declined to comment.
With 4.76 million customers and sales of 8.1 billion euros (£7.1 billion), Britain is Innogy's most important foreign market, but also its most challenging. Innogy was carved out from RWE (DE:RWEG) last year and focuses on energy and gas networks, renewables and retail.
Britain's big six, which also include Centrica (L:CNA), SSE (L:SSE), Iberdrola (MC:IBE), E.ON (DE:EONGn) and EDF (PA:EDF), are all under pressure from smaller rivals offering cheaper deals to attract customers and who now control around 20 percent of the market, up from less than 1 percent a decade ago.
In addition, the government has asked Britain's energy regulator Ofgem to impose a price cap on the most widely used tariffs.
"The British retail energy market is ripe for consolidation," one of the people said.
TRICKY VALUATION
British newspaper The Telegraph reported that SSE was also considering pulling out of Britain's energy supply business, either via a sell or spin-off, citing sources.
Npower ranked fifth among the big six in terms of electricity supply in the second quarter, according to data from Ofgem. Innogy has set a target of being among the top three in all relevant markets by 2025.
Last year, Npower made an adjusted loss before interest and tax of 109 million euros after 137 million in 2015. The loss narrowed to 12 million euros in the first half of 2017.
Valuing the loss-making company will be difficult, but dealmakers may agree to put a price tag on the customer base, two people close to the matter said.
"Every retail client is usually considered to be worth 250-300 euros," one of the people said, adding that in Npower's case the price would likely be at best the lower end of that range.
Innogy Chief Executive Peter Terium in September said that there were no concrete plans to sell Npower, even though the business was under review.
Innogy itself has been a subject to takeover speculation and one of the people said that a sale of Npower would make it easier to sell Innogy, in which parent RWE still holds a 76.8 percent stake.