Square, the payments company of Twitter co-founder Jack Dorsey, will buy Buy Now Pay Later (BNPL) flagship Afterpay for $29 billion, creating a global transaction giant in the largest purchase of an Australian company.
The acquisition underscores the popularity of a business model that has turned consumer credit on its head by charging merchants to make small point-of-sale loans that shoppers pay off in interest-free installments, bypassing credit checks.
It’s also locking in a significant rally in share prices for Afterpay, which traded for less than A$10 ($7.3) in early 2020, and has since soared as the COVID-19 pandemic — and stimulus payments to a workforce stuck at home — have seen an acceleration Soon. Switch to online shopping.
The two companies said in a joint statement on Monday that buying all shares would value the shares at A$126.21 ($92.65).
That means A$2.46 billion ($1.8 billion) was paid to Afterpay co-founders Anthony Eisen and Nick Molnar. China’s Tencent Holdings, which paid A$300 million ($220.2 million) for 5% of Afterpay in 2020, will receive A$1.7 billion ($1.2 billion).
“Acquiring Afterpay is a ‘proof of concept’ to buy now, pay later, instantly validating the industry and creating a formidable new competitor to Affirm Holdings Inc, PayPal Holdings Inc and Klarna Inc,” said Trust Securities analysts.
“We expect Square to invest heavily to integrate Afterpay and accelerate organic revenue growth.”
Afterpay shares jumped just above Square’s indicative purchase price in early trading before settling just below it at A$116.51 ($85.5) by mid-afternoon, up 20.55 percent and helping to propel the broader market 1.4 percent higher.
“We’ve built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand that aligns with these principles,” Dorsey said in the statement.
“Together we can better connect…our ecosystems to deliver more compelling products and services to merchants and consumers, and put the power back in their hands.”
Afterpay’s founders said the deal represented “an important recognition for the Australian tech sector as local innovation continues to be more widely shared around the world”.
The deal, which beat the previous record for a completed Australian purchase – the $16 billion sale of Westfield’s global shopping empire to Unibail-Rodamco in 2018 – also lifted shares of BNPL rival Zip, by 7.53 per cent.
Big competitors have entered the market recently, adding to the challenges for Afterpay and its peers. For example, Apple is partnering with Goldman Sachs on a buy now, pay later service that will be tied to Apple Pay, Bloomberg News reported in July. Afterpay shares were down 10 percent the day after the report.
Afterpay is also competing with Sweden-based unlisted Klarna as well as new offerings from veteran online payments provider PayPal in the US.
Few other suitors are quite as fit as Square,” Wilsons Advisory and Stockbroking analysts said in a research note.
“With… PayPal has already had early success in the original BNPL, unlike the big American tech giants [Amazon, Apple] By pressing on with the 11-hour show, we expect the competing proposal from a new, low-stakes party.”
Credit Suisse analysts said the association appeared to be “clearly fitting” with “strategic advantage” on the basis of selling cross-payment products, and agreed that a competing bid was unlikely.
The Australian Consumer and Competition Commission, which will need to approve the deal, said it had just been notified of the plan and would “study it carefully once we see the details”.
Created in 2014, Afterpay pioneered the no-credit online payments segment that took off in the last year as more people, especially young people, chose to pay in installments for everyday items during the pandemic.
BNPL companies lend shoppers instant money, usually a few thousand dollars, that can be repaid without interest.
Since they generally make money from the merchant’s commission and late fees – not interest payments – they avoid 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 they usually 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 uptake among users has led to rapid growth in the sector, and is said to have prompted Apple to launch a service.
For Afterpay, the deal with Square provides a large customer base in its main target market, the United States, where its 2021 financial sales nearly tripled to A$11.1 billion ($8.1 billion) in constant currency terms.
The agreement “looks close to a done deal, in the absence of a superior offering,” said Philip Chippendale, an analyst at Ord Minnett, adding that it “brings in significant benefits at scale, including Square’s Seller and Cash app products.”
A person familiar with the deal said talks between the two companies began more than a year ago, and Square was confident there was no competing bid.
Postpay shareholders will receive 0.375 Square class A shares for every Afterpay share they own, which means a share price of about A$126.21 (US$92.64) per share based on Square’s Friday closing, the companies said. The deal includes a break clause of A$385 million ($282.62 million) arising from certain circumstances, such as Square’s investors not agreeing to the takeover.
Square said it will conduct a secondary listing on the Australian Stock Exchange to allow Afterpay shareholders to trade in shares via CHESS filing interests.
Morgan Stanley advised Square on the transaction, while Goldman Sachs and the Highbury Partnership consulted with Afterpay and its board of directors.