SYDNEY — Square Inc, the payments company of Twitter Inc co-founder Jack Dorsey, will buy buy now, pay later (BNPL) pioneer Afterpay Ltd for $29 billion, creating a global transactions giant in the biggest buyout from an Australian company.
The takeover underscores the popularity of a business model that has disrupted consumer credit by charging merchants a fee to offer small point-of-sale loans that their buyers repay in interest-free installments, bypassing credit checks .
It also locks in a remarkable run in share price for Afterpay, whose shares traded below AU$10 at the start of 2020 and have since soared as the COVID-19 pandemic – and payments from stimulus to a workforce stuck at home – have seen a rapid shift to online shopping.
Buying back all the shares would value the shares at A$126.21 ($92.65), the companies said in a joint statement on Monday.
That means a salary of A$2.46 billion each for Afterpay founders Anthony Eisen and Nick Molnar. China’s Tencent Holdings Ltd, which paid A$300 million for 5% Afterpay in 2020, reportedly pockets A$1.7 billion.
“The acquisition of Afterpay is a ‘proof of concept’ moment to buy now, pay later, both validating the industry and creating a formidable new competitor for Affirm Holdings Inc, PayPal Holdings Inc and Klarna Inc,” said analysts at Truist Securities.
“We expect Square to invest heavily to integrate Afterpay and accelerate organic revenue growth.”
Afterpay shares jumped slightly above Square’s indicative buy price in early trading before settling just below AUD 116.51 by mid-afternoon, up 20.55% and helping to push the broader market up 1.4%.
“We built our business to make the financial system more fair, accessible and inclusive, and Afterpay has built a trusted brand aligned with these principles,” Dorsey said in the statement.
“Together, we can better connect our…ecosystems to deliver even more compelling products and services to merchants and consumers, empowering them.”
Afterpay’s founders said the deal marked “significant recognition for Australia’s tech industry as homegrown innovation continues to be shared more widely across the world.”
STOCK INCREASE
The deal, which eclipses the previous record for a completed Australian takeover – the $16 billion sale of Westfield’s global shopping center empire to Unibail-Rodamco in 2018 – has also boosted shares of rival BNPL player Zip Co Ltd, by 7.53%.
Afterpay also competes with unlisted Swedish company Klarna Inc, as well as new offerings from veteran US online payments provider PayPal Holdings Inc.
“Few other contenders are as well-suited as Square,” analysts from Wilsons Advisory and Stockbroking said in a research note.
“With…PayPal already achieving early success in their native BNPL, with the exception of major US tech titans (Amazon.com Inc, Apple Inc) pushing for an 11 a.m. bid, we expect a proposal competitor of a new party is low risk.”
Credit Suisse analysts said the tie-up appeared to be a “clear fit” with “strategic merit” based on cross-selling payment products, and agreed a competing bid was unlikely.
Australia’s Competition and Consumer Commission, which is expected to approve the transaction, said it had just been made aware of the plan and “will review it carefully once we see the details”.
POPULARITY
Established in 2014, Afterpay was the forerunner of the niche online payments industry without credit checks that burst into the mainstream last year as more and more people, especially young people, chose to pay in installments for everyday items during the pandemic.
BNPL companies lend buyers instant funds, usually up to a few thousand dollars, which can be repaid without interest.
Since they usually make money from merchant commissions and late fees – not interest payments – they circumvent the legal definition of credit and therefore credit laws.
This means that BNPL providers are not required to perform background checks on new accounts, unlike credit card companies, and normally only ask for the applicant’s name, address and date of birth. Critics say this makes the system an easier target for fraud.
Loose regulation, growing popularity, and rapid user adoption have led to rapid growth in the industry and reportedly even prompted Apple to launch a service.
For Afterpay, the deal with Square provides a broad customer base in its main target market, the United States, where its sales for fiscal year 2021 nearly tripled to A$11.1 billion in constant currencies.
The deal “appears close to a done deal, absent a superior proposition,” Ord Minnett analyst Phillip Chippindale said, adding that it “brings significant benefits of scale, including to Square’s Seller and Cash app products”.
Talks between the two companies began more than a year ago and Square was confident there was no competing offer, a person with direct knowledge of the deal said.
Afterpay shareholders will receive 0.375 Class A Square shares for each Afterpay share they hold, implying a price of approximately A$126.21 per share based on Square’s close on Friday, the companies said. . The deal includes a break clause worth A$385 million triggered by certain circumstances, such as if Square’s investors don’t approve the takeover.
Square said it would undertake a secondary listing on the Australian Securities Exchange to allow Afterpay shareholders to trade shares through CHESS Depository Interests (CDIs).
Morgan Stanley advised Square on the deal, while Goldman Sachs and Highbury Partnership consulted with Afterpay and its board.
($1 = 1.3622 Australian dollars)
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