Deutsche Boerse Cuts Profit Target; CEO Kengeter Quitting

(Bloomberg) -- Deutsche Boerse AG Chief Executive Officer Carsten Kengeter resigned amid growing shareholder pressure after he became embroiled in an insider-trading probe. The company also said it isn’t likely to meet its full-year earnings targets.

The CEO will step down on Dec. 31 “in order to allow the company to focus its energy back onto clients, business and growth and to avoid further burdens caused by the ongoing investigation,” Deutsche Boerse said in a statement on Thursday. No replacement was named.

Kengeter had faced criticism from investors after prosecutors in Frankfurt said they were investigating his stock trades. At issue was the purchase of 4.5 million euros ($5.3 million) of Deutsche Boerse shares in December 2015, before it emerged that the exchange was seeking to take over London Stock Exchange Group Plc -- a deal that ultimately failed. Union Investment, a top 30 shareholder, said it welcomed the CEO’s resignation.

“It’s better to move on from the probe rather than let this investigation linger and potentially distract the company, executive management team and employees,” Keefe, Bruyette & Woods analyst Kyle Voigt said in a note.

Forecast Cut

Kengeter resigned a week after LSE Group CEO Xavier Rolet said he would step down at the end of 2018. Rolet was seen ending his LSE career on a high note. But hours after Kengeter’s departure was announced, Deutsche Boerse said its prior 2017 forecast -- which called for an increase in net income by 10 percent to 15 percent, and a gain in revenue of 5 percent to 10 percent -- was probably unachievable.

Analysts at UBS Group AG had said earlier this week that the exchange could lower its earnings growth target for the year. Deutsche Boerse’s goals for 2018 are also “overly optimistic,” given the third-quarter earnings and current volumes, RBC Capital Markets analysts including Peter Lenardos wrote in a note on Thursday.

Revenue rose 3 percent to 576.3 million euros in the third quarter from a year earlier on growth from the company’s Clearstream unit and the index business of its market data and services division. That more than offset a “weak” performance in index derivatives caused by low equity market volatility, its filings show

Deutsche Boerse is “a somewhat disciplined organization, so normally I would say that their path wouldn’t change much” following the Kengeter announcement, said Rich Repetto, an analyst at Sandler O’Neill & Partners LP in New York. “However, given the fallout of the LSE deal, I think their direction was a bit uncertain to begin with.”

A deal to settle the insider-trading probe started to unravel as soon as it was reached. The company accepted a fine of 10.5 million euros, as well as a 500,000 euro fine for Kengeter himself, to end the case, but a Frankfurt court refused to sign off on the deal.

The prolonging of the investigation created a time squeeze for Deutsche Boerse’s board -- German regulators would only start their assessment of whether he was fit to run the company after the conclusion of the proceedings in Frankfurt, but the CEO’s contract was set to expire in March.

The German financial watchdog Bafin said it would no longer pursue a planned suitability check of Deutsche Boerse management as it would have been unable to complete the check before Kengeter’s announced departure.

‘Deep Regret’

“It was with deep regret that the supervisory board accepted this request and unanimously thanked Carsten Kengeter for his vision and leadership,” the exchange said. The company has called the insider trading allegations “unfounded,” while Kengeter has said such an offense betrays “his innermost conviction.”

Kengeter was hired in 2014 and became CEO the following year. He had previously worked at UBS, where he helped run its investment bank. Deutsche Boerse shares have rallied about 24 percent during Kengeter’s tenure, outperforming the broader German benchmark since he became CEO in June 2015. After the announcement, the shares rose 0.6 percent to 91 euros in Frankfurt trading.

LSE and Deutsche Boerse had long sought to create a European champion that could counter heavyweights in the U.S., while having to contend with growing titans in Asia. The Anglo-German tie-up would potentially have been the most profitable company in its industry, spanning more than 30 countries. 

But the deal, plagued by the Brexit vote and squabbles over the future location of the merged entity’s headquarters, collapsed after regulators said the merger would harm competition. The decision, at a time when exchanges face growing challenges from Europe’s MiFID II rules, reignited competition between the two companies for over-the-counter clearing -- a key business that Brexit has made even more politically charged -- and is forcing the German company to seek other ways to grow or cut expenses.

“It’s good to have this dealt with, but Kengeter is also going to be missed,” said Andreas Plaesier, an analyst at M.M. Warburg in Hamburg. “He really did a lot of work setting the company up for its future. He’ll be hard to replace.”

--With assistance from Karin Matussek Nick Baker Lukas Strobl and Konrad Krasuski

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net, Steven Arons in Frankfurt at sarons@bloomberg.net.

To contact the editors responsible for this story: Trista Kelley at tkelley2@bloomberg.net, Andrew Blackman, Christian Baumgaertel

©2017 Bloomberg L.P.