Cerberus Demands Commerzbank Board Seats After Attack on Leaders

(Bloomberg) -- Cerberus Capital Management LP slammed Commerzbank AG’s leadership and demanded two seats on its board, taking an activist stance that could herald more radical change at the German lender.

In letter seen by Bloomberg News, Commerzbank’s No. 2 investor said top management led by Chief Executive Officer Martin Zielke is focused on unprofitable revenue growth and lacks the resolve to slash costs. The five-page document, dated June 9 and sent to the supervisory board, also raised the possibility of a shareholder revolt should the bank refuse to appoint its representatives.

Cerberus is “alarmed by the refusal of the management and supervisory boards to acknowledge the seriousness of the situation and the abject failure to take appropriate remedial actions,” it said in the letter, which demanded a response by the end of this week. The “window of opportunity to address the challenges is rapidly closing.”

The letter marks a change in approach for the U.S. investor, which has seen the value of its stake erode, though it so far abstained from outright confrontation with a company that’s still part-owned by the government. But after merger talks with Deutsche Bank AG collapsed last year and a new turnaround plan by Zielke failed to persuade investors, frustration with the lack of progress has come to a boiling point.

Commerzbank said in an emailed statement that it had received Cerberus’s letter and would continue to engage with the investor. The bank plans to present the next step in its strategy when it publishes second-quarter results, according to the statement.

Cerberus’s Bet

Cerberus’s move puts Commerzbank’s “standalone status back in jeopardy and heaps pressure on CEO Martin Zielke to hasten restructuring and set more demanding financial goals,” Bloomberg Intelligence analyst Philip Richards wrote in a note. “As revenue pressure rises, there’s a need for more draconian cost cuts, including a firm cost-to-income-ratio target and a more challenging return on equity goal.”

Commerzbank shares have lost more than half since Cerberus revealed its 5% stake in July 2017, making it one of the worst stock performances among European banks over that period.

Cerberus unveiled its stake shortly after Zielke unveiled his first turnaround plan -- a move away from investment banking and toward corporate and retail lending, including an aggressive push to add clients in its home market Germany. The strategy was effectively a bet that, after years of negative interest rates in Europe, borrowing costs would eventually rise and make banking in the region more profitable.

Cerberus, which had made smaller investments in other European lenders before, also took a stake in Deutsche Bank. Both were unusual investments for a buyout firm, because they were minority stakes with limited room to push management into action. The German government still owns more than 15% of Commerzbank, meaning any strategic change would need to get a nod from Berlin.

Consulting Proposals

Zielke largely failed to achieve the targets of his first turnaround plan, in part because higher interest rates never materialized. After talks with Deutsche Bank -- which were encouraged by Cerberus and the German finance ministry -- failed, he presented new targets in September that were widely seen as unambitious. He is now working on yet another strategic update.

Cerberus said in its letter that the bank has “failed to implement any significant operational, technology or management initiatives” and has ignored suggestions brought forward by investors.

The firm’s demands will likely be a topic at Commerzbank’s supervisory board meeting Wednesday, according to a person familiar with the matter.

Commerzbank has twice rejected proposals from Cerberus for consulting services via its advisory arm, Cerberus Operations Advisory Company, two people familiar with the matter said. The latest rejection came late last year after Cerberus criticized Zielke’s September plan for lacking ambition, the people said.

By contrast, Deutsche Bank accepted an advisory contract, which ran out at the end of last year. Cerberus has since been supportive of Deutsche Bank’s strategy under CEO Christian Sewing.

Cerberus didn’t name the two representatives it wants added to the supervisory board. It said it prefers to work constructively with the bank but warned that other investors would “be highly supportive of efforts to enact significant change” at the supervisory and management boards as well as to the company’s strategy.

The German government has also been critical of Zielke’s plan. It commissioned Boston Consulting Group to compile a report detailing strategic alternatives, Bloomberg has reported. The government recently replaced its two representatives on the supervisory board with people who have more banking expertise.

The BCG report said the bank should move more quickly toward a digital strategy and make deep cuts to its branch network with the goal of doubling or tripling its cost cutting targets, people familiar with the matter said at the time.

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