(Bloomberg) -- Trafigura Group is reducing its share buybacks this year, as a drop in profits coincides with a generational succession at the top of the commodity trading giant, according to people familiar with the matter.
Several senior departures mean that Trafigura faces an unusually large bill for buybacks, which are the main way it rewards the roughly 1,400 top employees who own the company. Each year, Trafigura commits to repurchasing a significant chunk of shares from its employees — with payments to larger shareholders being spread over a series of installments. When employees leave, the trader buys them out, also over several years.
This year, Trafigura is making lower commitments to buy back shares from existing employees, and also deferring some of the already-planned buybacks, the people said, asking not to be identified as the matter isn’t public. The company has started informing employees of the decisions in recent days, following the close of its financial year at the end of September.
Trafigura’s share repurchases have become a conduit for vast riches in recent years, as an energy crisis delivered a bonanza to the trading industry. Since the Covid pandemic, Trafigura has paid out about $10 billion to its senior staff through the buyback system.
Still, the trader is now facing a sharp drop in profitability driven by lower market volatility — earnings are normalizing after by far the most profitable period in the company’s history — as well as a $1.1 billion hit in Mongolia. What’s more, a recent exodus of senior executives means it also has built up a hefty obligation to buy out departing shareholders.
A spokesperson for Trafigura declined to comment.
Trafigura has wide discretion about when to make the buybacks, and it’s not the first time that the trading house has delayed payments. The changes are a way for Trafigura to conserve cash at a time when its profits are falling, while also allowing a new generation of traders to build a larger ownership stake in the company, the people said.
Still, they underscore a tension within Trafigura, as a new group of leaders braces for leaner times ahead, even as a large share of the company’s profits goes to pay out the previous generation.
Senior executives who have recently left the company include Mike Wainwright, the company’s long time chief operating officer, who is due to stand trial next month on Swiss corruption charges, which he denies; Jose Larocca, the long-time head of oil; Christophe Salmon, who was chief financial officer; former head of M&A Jesus Fernandez; and former co-head of metals Kostas Bintas.
The management succession will culminate in January, when Richard Holtum takes over as chief executive officer. He replaces Jeremy Weir, who has led Trafigura for a decade and will become chairman.
Smaller Gain
One of the most closely watched numbers at Trafigura is the annual increase in the price of shares held by employees, which in turn is used to determine how much the company buys back from each shareholder. The price gain is calculated each year by Trafigura based on its annual results, and then communicated to shareholders.
This year’s share price increase was 71%, the people said. That’s down substantially from 188% last year and 247% in 2022, reflecting a sharp drop in the company’s profit for the financial year through September, which it’s due to report publicly in the next few weeks.
Trafigura typically buys back an amount from each shareholder equivalent to the growth in value of their shares in the previous financial year, leaving the value of their ownership constant, according to several current and former employees.
This year, while the amounts vary from one employee to another, on average the company is planning to buy back less from current employees. That means the value of their shareholding will grow, but also that they will get less cash in the near term.
The company is also deferring some buybacks that had been due to be made in the coming year — a move that affects former as well as current employees. When a shareholder leaves Trafigura, the value of their shares is fixed and the company generally agrees to buy them back in five installments: one on departure, and then at the end of each subsequent year, according to a 2021 prospectus.
The company uses a similar arrangement to buy back shares each year from continuing employees, with smaller shareholders being paid out in one go while larger shareholders are also paid out in installments.
By slowing the payouts to current employees, Trafigura is increasing the financial jeopardy for any who might leave to competitors, at a time of hot competition for trading talent. The company recently extended the contractual period during which some of its senior traders can’t work for competitors to as much as 12 months, Bloomberg reported previously.
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