Jack Dorsey’s Square snaps up Australia’s Afterpay for $29bn

Square, the payments firm of Twitter co-founder Jack Dorsey, will purchase buy now, pay later (BNPL) pioneer Afterpay for $29bn, creating a global-transactions giant in the biggest buyout of an Australian firm.

The takeover underscores the popularity of a business model that has upended consumer credit by charging merchants a fee to offer small point-of-sale loans that their shoppers repay in interest-free instalments, bypassing credit checks.

It also locks in a remarkable share-price run for Afterpay, whose stock traded below 10 Australian dollars ($7.3) in early 2020 and has since soared as the COVID-19 pandemic – and stimulus payments to a workforce stuck at home – saw a rapid shift to shopping online.

The all-stock buyout would value the shares at 126.21 Australian dollars ($92.65), the companies said in a joint statement on Monday.

That means a payday of 2.46 billion Australian dollars ($1.8bn) each for Afterpay’s founders, Anthony Eisen and Nick Molnar. China’s Tencent Holdings, which paid 300 million Australian dollars ($220.2m) for 5 percent of Afterpay in 2020, would pocket 1.7 billion Australian dollars ($1.2bn).

“Acquiring Afterpay is a ‘proof of concept’ moment for buy now, pay later, at once validating the industry and creating a formidable new competitor for Affirm Holdings Inc, PayPal Holdings Inc and Klarna Inc,” Truist Securities analysts said.

“We expect Square will invest heavily to integrate Afterpay and accelerate organic revenue growth.”

Afterpay shares jumped slightly higher than Square’s indicative purchase price in early trading before settling just below it at 116.51 Australian dollars ($85.5) by mid-afternoon, up 20.55 percent and helping push the broader market up 1.4 percent.

“We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles,” said Dorsey in the statement.

“Together we can better connect our … ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.”

The Afterpay founders said the deal marked “an important recognition of the Australian technology sector as homegrown innovation continues to be shared more broadly throughout the world”.

‘Obvious fit’

The deal, which eclipses the previous record for a completed Australian buyout – the $16bn sale of Westfield’s global shopping mall empire to Unibail-Rodamco in 2018 – also pushed up shares of rival BNPL player Zip, by 7.53 percent.

Larger competitors have pushed into the market recently, adding to the challenges for Afterpay and its peers. For example, Apple is teaming up with Goldman Sachs on a buy now, pay later service that would be tied with Apple Pay, Bloomberg News reported in July. Afterpay shares fell 10 percent the day following the report.

Afterpay also competes with unlisted Sweden-based Klarna as well as new offerings from US veteran online payments provider PayPal.

“Few other suitors are as well-suited as Square,” said Wilsons Advisory and Stockbroking analysts in a research note.

“With … PayPal already achieving early success in their native BNPL, other than major American tech-titans [Amazon, Apple] lobbying an 11th-hour bid, we expect a competing proposal from a new party to be low-risk.”

Credit Suisse analysts said the tie-up seemed to be an “obvious fit” with “strategic merit” based on cross-selling payment products, and agreed a competing bid was unlikely.

The Australian Competition and Consumer Commission, which would need to approve the transaction, said it had just been notified of the plan and “will consider it carefully once we see the details”.

Rapid growth

Created in 2014, Afterpay has been the bellwether of the niche no-credit-checks online payments sector that burst into the mainstream last year as more people, especially youngsters, chose to pay in instalments for everyday items during the pandemic.

BNPL firms lend shoppers instant funds, typically up to a few thousand dollars, which can be paid off interest-free.

As they generally make money from merchant commission and late fees – and not interest payments – they sidestep the legal definition of credit and therefore credit laws.

That means BNPL providers are not required to run background checks on new accounts, unlike credit card companies, and normally request just an applicant’s name, address and birth date. Critics say that makes the system an easier fraud target.

The loose regulation, burgeoning popularity, and quick uptake among users have led to rapid growth in the sector and has reportedly driven Apple to launch a service.

For Afterpay, the deal with Square delivers a large customer base in its main target market, the US, where its fiscal 2021 sales nearly tripled to 11.1 billion Australian dollars ($8.1bn) in constant currency terms.

The agreement “looks close to a done deal, in the absence of a superior proposal,” said Ord Minnett analyst Phillip Chippindale, adding that it “brings significant scale advantages, 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 rival offer, said a person with direct knowledge of the deal.

Afterpay shareholders will get 0.375 of Square class A stock for every Afterpay share they own, implying a price of about 126.21 Australian dollars ($92.64) per share based on Square’s Friday close, the companies said. The deal includes a break clause worth 385 million Australian dollars ($282.62m) triggered by certain circumstances, such as if Square investors do not approve the takeover.

Square said it will undertake a secondary listing on the Australian Securities Exchange to allow Afterpay shareholders to trade in shares via CHESS depositary interests.

Morgan Stanley advised Square on the deal, while Goldman Sachs and Highbury Partnership consulted for Afterpay and its board.

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