London - Commodity trading giant Trafigura is going through a once-in-a-generation ownership reshuffle, spending billions of dollars to buy out its earliest shareholders and allocating stock to a new generation of would-be billionaire traders.
A Reuters analysis of accounts for Swiss-based Trafigura shows it has spent around $2 billion on share buybacks over the past three years, and the unlisted company says it could spend another $1.5 billion until 2017 if profits allow.
The scale of the exercise, in a company where shareholders' equity only just tipped $5 billion at the end of September, indicates a major rebalancing of ownership and confirms executives have no wish to follow rival Glencore into a public listing of its stock, which would be an alternative route for founder shareholders to cash out.
“We undertake share buybacks for two reasons. First, to pay departing employee shareholders and, second, to rebalance shareholdings of current employees to avoid undesirable concentrations of ownership and to align shareholder return with contribution,” a Trafigura spokesman said.
All but one of the original founders from 1993 have retired from executive positions. It is not clear how much each of the retired men used to control, but no shareholder holds more than 5 percent in Trafigura's 2013 accounts, except for Claude Dauphin, a founder who remains chairman and chief executive and owns “less than 20 percent”.
“Dauphin is very much in control and remains a very strong revenue generator and deal maker,” a senior executive at a rival trading house said.
The rest of the shares are held by 700 senior managers, past or present, which would include any of the other living founders - Eric de Turckheim, Graham Sharp, Daniel Posen and Mark Crandall - still owning shares.
GOLDMAN SACHS MODEL
Buybacks went up from $357 million in 2011, or roughly 10 percent of shareholders' equity at the time, to $787 million in 2012, or over 20 percent of equity. Last year, the buybacks amounted to as much as $855 million, or 17 percent of equity of about $5 billion.
Together with planned buybacks of $1.515 billion until 2017, Trafigura will have changed more than two thirds of its ownership over six or seven years, assuming shareholdings are redeemed at balance sheet value.
The company, whose board is filled with relatively young managers, doesn't disclose how shares are redistributed after buybacks or on what valuation basis newcomers buy in.
“It is a once-in-a-generation change,” a source at a rival trader said.
The younger generation in charge now includes chief operational officer Mike Wainwright, head of mining and market risk Jeremy Weir, head of non-ferrous commodities Simon Collins, head of oil trading Jose Larocca, head of derivative trading Duncan Letchford and chief financial officer Pierre Lorinet.
A record $10 billion initial public share offering by rival Glencore in 2011 produced a string of billionaires and created an expectation in the market that more trading houses would follow suit.
Glencore's subsequent merger with Xstrata created a mining and trading giant with a capitalisation of $68 billion, nearly 14 times Trafigura's book value, which could be multiplied several times for an IPO valuation.
However, no major trading house has conducted an IPO since Glencore, preferring a private status that allows them to disclose as little as possible and avoid giving competitors an insight into their trading strategy.
There is also an argument from fairness for maintaining a private company, in that an IPO can give an unearned bonus to those who have bought into a company below market value.
“It is very much like the old Goldman Sachs model,” an industry source said of the buyback philosophy.
Wall Street bank Goldman was a private partnership throughout most of last century until it went public in 1999.
Goldman's partners had opposed an IPO several times, with some senior leaders arguing that partners who were let in at book value should leave at book value, too, rather than be allowed to cash out at an IPO price that reflected the work of previous generations.
Whatever its specific reasons, Trafigura's hefty buybacks reinforce its inclination to remain a private company owned by its employees.
“We believe this is the best ownership model for our core trading business,” Dauphin said in the company's financial statements last month. -Reuters