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 which 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 AUD 10 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 AUD 126.21,
the companies said in a joint statement on Monday.
That means a payday of AUD 2.46 billion each for Afterpay's
founders, Anthony Eisen and Nick Molnar. China's Tencent, which paid AUD 300
million for 5 percent of Afterpay in 2020, would walk away with AUD 1.7 billion.
"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".
Stock surge
Afterpay shares jumped slightly higher than Square's
indicative purchase price in early trading before settling just below it at AUD
119.36 by late morning, up 23.5 percent and helping push the broader market up
1.2 percent.
The deal, which eclipses the previous record for a completed
Australian buyout - the $16 billion sale
of Westfield's global shopping mall empire to Unibail-Rodamco in 2018 - also
pushed up shares of rival BNPL players.
Afterpay competes with unlisted Sweden-based Klarna,
Australia-listed Zip Co, and 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 Klarna rumoured to be building a strategic stake
in Z1P, and PayPal already achieving early success in their native BNPL, other
than major US tech-titans lobbying an 11-th 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 that a competing bid seemed unlikely.
The Australian Competition and Consumer Commission, which
would need to approve the transaction, said it had only just been notified of
the plan and "we will consider it carefully once we see the details".
Popularity
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 has led to rapid growth in the sector, and has reportedly even
driven Apple to launch a service.
For Afterpay, the deal with Square delivers a large customer
base in its main target market, the United States, where its fiscal 2021 sales
nearly tripled to AUD 11.1 billion in constant currency terms.
The deal "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 AUD 126.21 per
share based on Square's Friday close, the companies said.
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 (CDIs).
© Reuters
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