6 ★ FINANCIAL TIMES Monday5 August 2019JAVIER ESPINOZA— LONDONKKRhas won the race to buy German
payments groupHeidelpayformore
than €600m in the latest sign of inves-
tor appetite for companies that offer
digital alternatives to cash.The private equity group’s offer for the
AnaCap-owned business beat rival
interest from Sweden’sNordic Capital
andEQT. Payments specialists World-
line and Nets also lost out, according to
people briefed on the transaction.
M&A activity in the payments sector
has been boomingin recent years, with
2019 becoming the third successive year
of record-breaking deal volumes. A
structural shifttowards digital and
online payments instead of cash has
driven up valuations and encouraged
companies to combine in search of
greater scale and geographic reach.
Heidelpay enables its clients to accept
online and mobile payments, and is
used by more than 30,000 merchants
including companies such as L’Oréal.
A person familiar with KKR’s strategy
said the buyout group hoped to expand
the group by adding customers in Ger-
many.
Heidelpay expects to generate
€40.5m in earnings before interest, tax,
depreciation and amortisation this year,
people with knowledge of its finances
said.
Private equity groups have been
involved in several payments deals in
recent years. A consortium led by CVC
and Blackstone bought Paysafe for £3bn
in 2017. Hellman & Friedman bought
Nets for $5.3bn a year later beforecom-
bining itwith Concardis, which was
owned by Bain Capital and Advent.
KKR was also involved in one of this
year’s biggest payments deals, the
$39bn sale of First Datato Fiserv. KKR
was First Data’s largest shareholder,
having bought the company in 2007.
The Heidelpay sale comes just two
years after AnaCap bought a majority
stake in the business for an undisclosed
amount.As part of the agreed transac-
tion, Mirko Huellemann, Heidelpay’s
founder and chief executive, will retain
a significant stake in the company.
KKR, Nordic Capital, Hellman &
Friedman and EQT declined to com-
ment. Worldline and AnaCap did not
respond to requests for comment.
An official announcement of the
transaction, which was agreed on Fri-
day, is expected this week.KKR wins
€600m race
for German
fintech group
DAVID CROW— LONDONBarclayscut the amount it set aside for
bonuses by 23 per cent in the first half of
the year asJes Staley, the chief execu-
tive, exerts a tighter grip on pay in a
push toachieve the bank’s profitability
target.
The UK-based bank put £456m
towards bonuses in the first six months
of 2019 versus £593m in the same
period last year, according to figures in
its half-year results statement, reflect-
ing a tougher approach to pay for its
investment bankers.
It was the lowest amount allocated to
the bonus pool in a first half since 2016,when Mr Staley started rebuilding the
investment bankafter a push by his
predecessor to scale back the unit.
Bankers receive variable pay awards
at the end of the year but banks take a
charge each quarter to reflect the rate at
which bonuses accrue. The steep cut in
first-half accrual suggests that Barclays
employees could receive a lower annual
bonus than they did last year.
Although Barclays does not break it
out, most of the bonus pool is used to
fund year-end awards for highly paid
staff at its investment bank in London
and New York, as opposed to those
working in its UK retail lender or inter-
national payments unit.
Revenues at the corporate and invest-
ment bank were virtually flat in the first
half compared to the same period of2018 at £5.3bn, suggesting that the
bonus cuts go beyond the kind of reduc-
tions typically imposed to reflect poor
performance.
Mr Staley has assumed greater day-
to-day control of the investment bank
since the departure earlier this year of
Tim Throsby, the former de facto head
of the unit, after a clashbetween the two
executives.
Mr Throsby left in part because of a
disagreement over the degree to which
bonuses should be cut to help the bank
meet its profitability target, which he
felt was unrealistic, according to several
people briefed on the dispute.
“Tim was less willing than Jes to take a
risk around compensation,” said one
Barclays executive, adding that Mr Sta-
ley believed he could achieve the bonus
cuts without prompting an exodus of
senior bankers.
The person said that a tough job mar-
ket for traders amid redundancies at
Deutsche Bankand Société Générale
meant there was less risk that disap-
pointed Barclays employees would quit
to find a job elsewhere.
Barclays declined to comment.
The bonus cuts come amida push at
Barclays to hit the lender’s central prof-
itability target for 2019 — a return on
tangible equity in excess of 9 per cent —
in part by improving returns at the
underperforming investment bank.
The investment bank is considerably
less profitable than Barclays’ other busi-
nesses, prompting some investors —
including activist Edward Bramson — to
call for the division to be scaled back.
Although the main profitability target
is considered sacrosanctby some insid-
ers, analysts are sceptical that Barclays
can hit the goal after a “challenging”
first half.Barclays reins
in bonuses as
Staley cracks
down on pay
3 Bank allocates 23% less in first half
3 Corporate and trading revenues flat
A tougher job market for
traders means there is
less risk that disappointedemployees will quit
Wolfgang MünchauGermany’s rising Euroscepticism has clear parallels with the early history of Brexit yOPINION
O
ne of the oddities of the
modern US stock market is
its strong predilection for
share buybacks. Rather
than finding profitable
outlets for their cash holdings by invest-
ing internally, corporations have taken
to shrugging their shoulders and simply
handing the stuff back en masse.
The idea of shrinking the number of
shares outstanding has acquired its own
momentum, and buybacks have
become an important driver of stock
performance. In recent years members
of the S&P 500 have increased their
spending on their own shares, last year
retiring 4 per cent of the index’s capitali-
sation. That is equivalent to $800bn.
Those buying back are not only
mature companies, whose investment
needmight be lower. They include
growth stocks such as tech groups and
those with big investment needs in
pharmaceuticals and defence. Indeed,
one of the heftier spenders of recent
years has been Boeing.
The company might seem an odd can-
didate for big buybacks. Its civil aviation
business involves huge multiyear
projects in which billions of dollars of
capital are put at risk. The programme
for the 787 Dreamliner, for instance,
lasted eight years and cost $32bn.
Yet Boeing has found the financial
space to splurge on its own stock.
Between 2013 and the end of the firstBoeing reveals perils behind the siren call of share buybacks
quarter of this year, it retired a net
200m shares, handing back $43bn to
holders. The number outstanding came
down by 25 per cent.
One reason it could was because of
savings on its latest aircraft, the now
notorious 737 Max, grounded after two
crashes killed 346 people. Instead of
building a wholly new aircraft, Boeing
simply bolted new fuel-efficient engines
on to a tweaked existing airframe. That
significantly reduced the project’s costs,
according to insiders. Boeing was able to
redirect some of those “savings” to
repurchase stock instead.
It illustrates a choice that many chief
executives have made: to prioritise buy-
backs over investment. In this, they
have received little but encouragement
from their financial backers. Share
repurchases seem a good bet to inves-
tors who are highly
focused on short-
term share price
performance com-
pared with the
uncertain (and
longer-term) gains
from new product
development.
Buybacks are, after all, the very pur-
est form of financial engineering. Unlike
special dividends, they don’t simply
gear the balance sheet, they supply a
further twist by reducing the shares in
issue. The result is to manipulate
upwards earnings per share — some-
times quite dramatically. In Boeing’s
case itpushed EPS last year up 20-25 per
cent against what it would have been
without the repurchases since 2013.
Who benefits from this optical lever-
age? Not necessarily the shareholders.
Buybacks tend to happen when share
prices are rising anyway, exposing them
to the risk of the company destroying
economic value by repurchasing over-
priced equity. The biggest winners aremanagers, especially those whose
remuneration is tied to stock market
measures such as EPS growth. Take Boe-
ing’s chief executive Dennis Muilen-
burg. Since becoming the boss in 2015
his pay has doubled. Last year he took
home a thumping $30m in compensa-
tion and gains from exercising options.
The problem with buyback gains is
that they are based on nothing more
than making equity prices more vola-
tile. So while profits and share prices are
rising, the lucky executive cashes in on
the favourable optics.
But buybacks are a fair-weather strat-
egy. So if events later sour, investors not
only give up all the optical gains: volatil-
ity occurs on the downside as well, thus
magnifying the share price decline. Fall-
ing share prices canalso have knock-on
effects, such as hitting credit ratings.
Boeing embarked on its buyback
splurge against a backdrop of rapidly
growing sales and profits due to the sales
success of the 737 Max — on course
before the crashes to be one of the best-
selling airliners of all time. Now, how-
ever, the outlook has become extremely
murky. Suggestions that Boeing
indulged in shortcuts to speed the
plane’s path to market mays even
imperil consumer trust.
The shares have fallen by nearly a
quarter since the March crash, leading
to the cancellation of a $20bn buyback
programme.Investors are waiting to see
how long the Max will be grounded,
what the costs will be, and whether con-
tracted sales will hold up.
Boeing faces a period ofinstability.
Investors might usefully ask themselves
how much their focus on the short run
has contributed to this predicament.
Perhaps it might have been better had
bosses indulged in rather less financial
engineering and more of the real kind.[email protected]INSIDE BUSINESS
ON MONDAY
Jonathan
Ford
If events sour, investors
not only give up all
the optical gains:volatility occurs on the
downside as wellANJLI RAVALA brutal sell-off in oil after US presi-
dent Donald Trump said he would
place a 10 per cent tariff on $300bn of
additional Chinese goods will
amplify concerns about weaker glo-
bal economic growth and the
demand for crude.An escalation in the trade war
between Washington and Beijing
comes as swelling oil output from the
US was already set to swamp stutter-
ing global demand during the next
year, threatening to undermine Opec-
led supply cuts. The International
Energy Agency said in its monthly oil
market outlook that data “show the
potential for oversupply next year”.
Oil supply from outside the cartel,propelled by the US, is expected to
expand by 2.1m barrels a day to 67m
b/d. This will far outpace any rise in
global demand of 1.4m b/d. This
means fewer Opec barrels will be
required to meet total expected con-
sumption of 101.7m b/d.
“Clearly, this presents a major chal-
lenge to those who have taken on the
task of market management,” said the
IEA of the deal between Opec and
Russia to support prices.
Demand growth had already been
in focus amid deteriorating trade and
manufacturing activity, which has
stoked worries about a weaker global
economy. The IMF has again revised
down its global growth forecast.
“Upside potential is in short supply
for spot oil prices,” said Stephen Bren-nock at London-based broker PVM.
“Underpinning this gloomy outlook is
a backdrop of economic malaise.”
Yet oil traders are having to weigh
competing bearish and bullish factors
that saw Brent crude, the interna-
tional benchmark, swing between $
and $67 a barrel last month.
Rising tensions between Iran and
western powers since US sanctions
were imposed on the Opec producer
have hit its oil exports. “The Iran cri-
sis is also becoming more acute,” said
Carsten Fritsch at Commerzbank.
Supply risks have also been ampli-
fied due to outages in other Opec
countries such as Venezuela and a
mounting security situation in the
Gulf, with tankers being seized and
claims of drones being shot down.Tight spot Price of crude oil under pressure
from falling demand and rising US output
Opec and non-Opec oil supply
Year-on-year change (million barrels per day)Source: International Energy Agency- - Opec crude
Opec natural
gas liquidsNon-Opec
Balance of supplyReuters
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