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Deutsche Börse-LSE merger to bridge political gaps, CEO says

Deutsche Börse AG CEO Carsten Kengeter said he sees the exchange's prospective merger with London Stock Exchange Group Plc as an opportunity to strengthen Europe's financial industry as well as boost the business's prospects in a difficult environment.

The planned merger, first announced nearly a year ago, has faced political opposition in Germany in particular, with authorities there keen that oversight of the combined entity remains in local control. The exchanges plan to have headquarters in both London and Frankfurt, but the official base is slated to be London, something that took on additional significance in the wake of Britain's vote to leave the EU.

But Kengeter told journalists Feb. 16 that European authorities cannot afford to stand still, warning that Asian and U.S. exchanges are creating ever more competition for Europe, adding to growing political pressures.

"Europe is not only suffering from political divergence. During times of growing protectionism the German model of high export surpluses, Europe's growth engine, is exposed to increasing risks," he said.

Deutsche Börse sees a successful merger with LSE as an integral part of its contribution to the economy of its own country and Europe as a whole, he added.

"Brexit has rendered this connection even more important. The merger would be a signal for a united Europe, a signal for bridges rather than walls," he said.

Deutsche Börse reported full-year 2016 preliminary consolidated net income of €722.1 million, up from €613.3 million in the previous year, and CFO Gregor Pottmeyer reiterated the forecast for a net income increase of 10% to 15% in 2017.

"We have fulfilled our ambitious growth forecast in a difficult financial year. This proves our ability to generate organic growth under our own steam," Kengeter said. "But if we want to limit what is an unequivocally cyclical impact of the markets in our business, we would have to move on."

Frankfurt, he pointed out, has dropped from sixth to 19th over the past decade in the Z/Yen Group's global financial centers index, meaning that the biggest risk for the city would be to do nothing. A tie-up with London will strengthen the German city's position as a financial center in continental Europe, he said.

"London is not only the biggest capital market in Europe but also in the world," he noted, adding that Deutsche Börse believes in London's ability "to draw international capital both from Asia and the U.S."

He also said the German state of Hesse, which must sign off on the merger, would not lose regulatory powers after the deal goes through, as the state's exchange supervisory authority will have full control over the Frankfurt Stock Exchange and of Eurex Deutschland. Deutsche Börse, as the operator of those two divisions, is not allowed to transfer them to the umbrella company under the German Exchange Act, Kengeter noted.

The CEO said Deutsche continues to hold talks with the Hesse authority but that the state has said it will make its decision after the European Commission gives its competition ruling on the merger.

The EC has pushed back the date for a final decision several times, most recently to April 3, with the latest postponement being made after Deutsche Börse and LSE formally committed to selling the French operating arm of LSE's clearing business Feb. 7. Shareholders of Euronext NV on Feb. 15 unanimously approved the acquisition of the clearing business, which is contingent on the merger between Deutsche Börse and LSE.

A European antitrust approval is the biggest roadblock in the way of the merger with LSE for the time being. The tie-up must be completed by June and there are a number of other approvals Deutsche Börse has to secure by that time. Nevertheless, Kengeter expressed confidence that the sale of LCH SA will be enough to get the green light from the EC.

"We believe we have addressed the relevant call requirements imposed by the EU with this proposed remedy," Kengeter said.

Kengeter also said he could not address questions on an investigation into his purchase of Deutsche Börse shares in December 2015, about two months before talks with LSE became public. He referred questions on the matter to Pottmeyer but stressed that insider trading is "against my innermost conviction."