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Twitter's Dorsey leads $29 billion buyout of lending pioneer Afterpay

Stock MarketsAug 02, 2021 01:33PM ET
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2/2 © Reuters. FILE PHOTO: A logo for the company Afterpay is seen in a store window in Sydney, Australia, July 9, 2020. REUTERS/Stephen Coates 2/2

By Byron Kaye and Paulina Duran

SYDNEY (Reuters) -Square Inc, the payments firm of Twitter Inc (NYSE:TWTR) co-founder Jack Dorsey, will purchase buy now, pay later pioneer Afterpay Ltd for $29 billion, creating a transactions giant that will battle banks and tech firms in the financial sector's fastest-growing business.

The takeover, Square's biggest deal to date and the largest buyout ever of an Australian firm, 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 shoppers repay in interest-free instalments, bypassing credit checks.

The buy now, pay later (BNPL) market has boomed in the past year as homebound consumers used it to borrow and spend online during the pandemic, and Apple Inc (NASDAQ:AAPL) and Goldman Sachs (NYSE:GS) were the latest heavyweights reported last month to be readying a version of the service.

Square's buyout could pave the way for more acquisitions, with Mastercard Inc (NYSE:MA), Visa Inc (NYSE:V), PayPal Holdings Inc (NASDAQ:PYPL) and others showing interest, said Christopher Brendler, an analyst with brokerage group D.A. Davidson.

"(BNPL) is more mainstream now and (this deal) is going to raise attention," he said.

Shares in Square surged 11%, while those in peer Affirm Holdings Inc rose as much as 17%.

Afterpay shareholders will get 0.375 of Square class A stock for every share they own, implying a price of A$126.21 per share based on Square's Friday close, the companies said. Afterpay shares closed at A$114.80, up 19%.

The buyout delivers a payday of almost A$2.5 billion ($1.8 billion) each for founders Anthony Eisen and Nick Molnar. China's Tencent Holdings (OTC:TCEHY) Ltd, which paid A$300 million for 5% of Afterpay in 2020, will pocket A$1.7 billion.

U.S. USERS

The deal, which eclipses the previous record for a completed Australian buyout, locks in a remarkable run for Afterpay, whose stock was worth just A$10 in early 2020.

The Melbourne-based company has signed up millions of users in the United States in the past year, making it one of the fastest-growing markets for BNPL and spurring broad interest in the sector.

"Acquiring Afterpay is a 'proof of concept' moment for buy now, pay later," Truist Securities analysts said, adding Square would now be a "formidable" competitor for Paypal, unlisted Swedish startup Klarna Inc and others.

Klarna was worth $46 billion in its last fundraising in June. Shares in Australian BNPL peers Zip Co Ltd and Sezzle Inc also closed higher on Monday.

"Not surprised those stocks are increasing on future consolidation speculations," D.A. Davidson's Brendler said. "Competition is heating up and they also have platforms that are very attractive."

Talks between the two companies began more than a year ago and Square was confident there was no rival offer, a person with direct knowledge of the deal told Reuters.

Credit Suisse (SIX:CSGN) 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 been notified of the plan and "will consider it carefully once we see the details".

"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 (NASDAQ:AMZN), Apple Inc) lobbying an 11-th hour bid, we expect a competing proposal from a new party to be low-risk."

The deal includes a break clause worth A$385 million triggered by certain circumstances such as if Square investors do not approve the takeover.

POPULARITY

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.

For Afterpay, the deal with Square delivers a large customer base in the United States, where its fiscal 2021 sales have already nearly tripled to A$11.1 billion in constant currency terms.

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).

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

($1 = 1.3622 Australian dollars)

Twitter's Dorsey leads $29 billion buyout of lending pioneer Afterpay
 

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Comments (5)
CHADWICK RICHINGTON
CHADWICK RICHINGTON Aug 01, 2021 8:04PM ET
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The USA is such a joke… debt slaves
Mike ND
Mike ND Aug 01, 2021 8:04PM ET
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I bet you own american stock tho haha
Ronald Warren
Ronald Warren Aug 01, 2021 7:49PM ET
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Get This. Square has a P/E of 71. That means a share of Square is really worth $3.46. That means Afterpay is really giving their company for $408,000. Zoom just played the same game!!!
Ronald Warren
Ronald Warren Aug 01, 2021 7:49PM ET
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sorry, 408 million.
Roger Miller
Roger Miller Aug 01, 2021 7:49PM ET
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It’s the tech bubble all over again where shares are being used as an overvalued currency. The smart investors will get out once the deal is done.
Indiana Jones
Indiana Jones Aug 01, 2021 7:49PM ET
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Get this. The fact that you said SQ "is really worth $3.46" b/c it "has a P/E of 71" means you have absolutely no idea how to value shares of a company. Utterly misleading bs.
Matt Brackley
Matt Brackley Aug 01, 2021 7:49PM ET
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ya ya...71 p/e is cheap for this market...things are different this time;)
Ronald Warren
Ronald Warren Aug 01, 2021 7:49PM ET
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I know that an acceptable value would be 15x earnings. However, someone is selling their company. Money talks.
Jon Bal
Jon Bal Aug 01, 2021 6:41PM ET
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i wanna know about the people financing "everyday items" component. are people really making payments on their undies?
Joel Schwartz
Joel Schwartz Aug 01, 2021 6:41PM ET
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And furniture too.
Indiana Jones
Indiana Jones Aug 01, 2021 6:41PM ET
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Hmm, didn't know that was such a huge mkt, esp for kids.
Kaveh Sun
Kaveh Sun Aug 01, 2021 6:19PM ET
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29b in shares meaning Square doesnt spend a dime. They just issue new stock shares.
Fluid Capital Investments
Fluid Capital Investments Aug 01, 2021 6:19PM ET
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thank you someone else knows what they are talking about
Indiana Jones
Indiana Jones Aug 01, 2021 6:19PM ET
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ugh, yeah I own SQ
Lake Lot
Lake Lot Aug 01, 2021 6:07PM ET
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Paid too much !!
Kaveh Sun
Kaveh Sun Aug 01, 2021 6:07PM ET
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No money exchange, afterpay gets square shares. Square issues new shares. U see all papper money.
Fluid Capital Investments
Fluid Capital Investments Aug 01, 2021 6:07PM ET
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thank you again Sun. love people who criticize this deal Dorsey knows what he's doing and where he is going.
 
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