The AU $ 39 billion (US $ 29 billion) that Square, the digital payments company of Twitter founder Jack Dorsey, is paying to acquire Australian payments company Afterpay is the largest buyout in the history of the world. Australian company.
It exceeds A $ 32 billion that European commercial real estate giant Unibail-Rodamco agreed to pay for Frank Lowy’s Westfield Corporation in 2017.
The deal marks an extraordinarily successful journey for Afterpay, a company founded in 2014 and listed on the Australian Stock Exchange in May 2016 at $ 1 a share.
At the end of last week, before the transaction was announced, its share price was AU $ 96.66, giving it a market cap of around $ 27.5 billion.
Square, which at the end of last week had a market cap of around $ 123 billion, could pay 1% of its tender offer in cash, but the rest will be in shares, giving Afterpay shareholders 0.375 shares of Square for each common share of Afterpay. .
The share swap means that the implicit price Square pays for the Afterpay share is around A $ 126.21, a premium of around 30.6% over its closing price last Friday.
Why so precious?
This is linked to the profitability of the “Buy Now Pay Later” (BNPL) market, in which Afterpay has been a pioneer. The market has become even more profitable due to the COVID-19 pandemic, which has accelerated the use of online and cashless payments while leaving more people strapped for cash.
How Afterpay works
BNPL companies are so called because they operate differently from traditional credit companies. The reason they first appeared in Australia can be attributed both to the “inventiveness of the Australian retail and financial sectors” as well as to an oddity of Australian laws regulating the market. credit.
Under Australia’s National Consumer Credit Protection Act, credit is defined (as defined in the dictionary) as a method of payment for goods, with the credit provider making profits by charging interest.
Afterpay does not charge consumers interest. Rather, the majority of its income comes from merchant fees, charging a commission of 4-6% on the value of the transaction plus 30 cents for each purchase. The rest of its income comes from billing late fees when customers don’t pay back on time.
Afterpay’s standard repayment plan is four equal installments every two weeks over two months. A missed payment results in an initial penalty of $ 10. If you still have an outstanding balance after one week, you will be charged an additional $ 7.
It could be argued that these late fees are the equivalent of charging interest – and a high interest payment to that. A late charge of $ 10 on a debt of $ 150 results in an effective interest charge of 6.67% bi-weekly.
But because they don’t explicitly charge interest, Afterpay and other BNPL companies are not covered by credit laws.
This has raised concerns that BNPL providers will profit at the expense of the most financially vulnerable consumers. In 2018, the Australian Securities and Investments Commission called for reform to fill the legal loophole. He wanted BNPL’s providers to operate under the same rules as credit providers, including the same responsible loan obligations for performing a credit check and verifying that customers could afford to take on debt.
However, this did not happen. A Senate inquiry last year ruled that no regulation was needed, instead approving self-regulation. Afterpay and its rivals signed a voluntary code of conduct earlier this year.
Read more: What is the difference between credit and debt? How Afterpay and Other “BNPL” Providers Bypass Consumer Laws
Despite these concerns, the ease of Afterpay’s technology makes it a very convenient way to buy things. Its logo becomes ubiquitous. In the year to June 30, the number of merchants offering it as a payment option increased by 77% to 98,200, and the number of customers by 63% to 16 million.
In the first six months of 2021, Afterpay’s gross profit was US $ 284 million, about 150% higher than the US $ 113 million profit recorded in the six months leading up to the pandemic of COVID-19 (July-December 2019).
With the BNPL market proving so lucrative, credit card companies, banks and tech companies are looking to strengthen themselves. Visa announced its BNPL plans in July 2019, and it is only rolling out its technology to merchants. Commonwealth Bank of Australia is also in the process of setting up its “StepPay” offer. Paypal launched its “Pay in 4” service last month. Apple also announced its own plans last month.
Read more: How to tell if your online shopping habit is a problem – and what to do if it is
Square, co-founded by Dorsey and Jim McKelvey in 2009, took the simpler route by buying out the market pioneer.
Afterpay’s board of directors unanimously recommended that shareholders accept the offer. Afterpay and Square shareholders have yet to approve the deal. The same is true for Treasurer Josh Frydenberg, under Australian Foreign Investment Laws.
But all this risks being a formality. It is too good an offer to refuse.