Square Inc, the payments business co-founded by Twitter Inc co-founder Jack Dorsey, will pay $29 billion for buy now, pay later (BNPL) pioneer Afterpay Ltd, marking it as a global transactions titan in the largest buyout of an Australian corporation.
The acquisition demonstrates the growing attractiveness of a business model that has upended consumer credit by charging merchants a charge to give modest point-of-sale loans that their customers repay in interest-free installments, skipping credit checks.
It also secured a spectacular share-price run for Afterpay, whose stock was trading around A$10 in early 2020 and has since skyrocketed as the COVID-19 epidemic spread and stimulus payments to laborers stuck at home - saw a tremendous shift to shopping online.
As part of the company’s joint statement on Monday, the all-stock buyout would value the shares at A$126.21 ($92.65).
In line with this, Afterpay's founders, Anthony Eisen and Nick Molnar, will each earn A$2.46 billion. Tencent Holdings Ltd (0700.HK) of China, which paid A$300 million for 5% of Afterpay in 2020, would collect A$1.7 billion.
"Acquiring Afterpay represents a 'proof of concept' moment for purchase now, pay later, validating the sector while also establishing a powerful new rival 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 rose slightly higher than Square's suggested purchase price before closing just below it at A$116.51 by midday, up 20.55 percent and helping to boost the overall 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 deal appears as a landmark for "an important recognition of the Australian technology sector as homegrown innovation continues to be shared more broadly throughout the world" - said by the company founders.
The transaction, which surpassed the previous record for a completed Australian buyout - the $16 billion sale of Westfield's global retail mall business to Unibail-Rodamco in 2018 - boosted shares of rival BNPL participant Zip Co Ltd by 7.53 percent.
Afterpay also competes with the unlisted Sweden-based Klarna Inc, as well as new products from PayPal Holdings Inc, a veteran online payments provider in the United States (PYPL.O).
"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 U.S. tech-titans (Amazon.com Inc (AMZN.O), Apple Inc (AAPL.O)) lobbying an 11-th hour bid, we expect a competing proposal from a new party to be low-risk."
Analysts at Credit Suisse said the merger appeared to be an "obvious match" with "strategic potential" based on cross-selling payment products, and that a competing offer was improbable.
The Australian Competition and Consumer Commission, which would have to approve the transaction, said it had just received the updates of the plan and "will consider it carefully once we see the details".
Afterpay, which was founded in 2014, has been the bellwether of the niche no-credit-checks online payments business, which exploded into the mainstream last year as more individuals, particularly young people, decided to pay in installments for ordinary products amid the epidemic.
BNPL companies lend customers immediate cash, usually up to a few thousand dollars, which may be repaid interest-free.
Because they often generate money via merchant commissions and late fines rather than interest payments, they skirt the legal definition of credit and hence credit regulations.
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 lack of regulation, increasing popularity, and rapid user adoption has resulted in rapid expansion in the sector, and has allegedly prompted Apple to establish a service.
Afterpay's partnership with Square provides it with a huge client base in its primary target market, the United States, where its fiscal 2021 revenues nearly quadrupled to A$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, mentioning that it "brings significant scale advantages, including to Square's Seller and Cash app products."
Talks between the two businesses occurred more than a year ago, and Square was certain there would be no competing bid, according to a source with direct knowledge of the transaction.
According to the businesses, Afterpay owners would get 0.375 of Square class A shares for each Afterpay share they possess, indicating a price of roughly A$126.21 per share based on Square's Friday closing. The agreement has a A$385 million break clause that is activated in specific situations, such as if Square investors do not approve the transaction.
Square announced a secondary listing on the Australian Securities Exchange to enable Afterpay owners to trade shares through CHESS depositary interests (CDIs).
Square was advised by Morgan Stanley on the transaction, while Afterpay and its board were consulted by Goldman Sachs and Highbury Partnership.