Billionaire Twitter founder Jack Dorsey today confirmed his payments giant business Square Inc will acquire pioneering buy now pay later (BNPL) entity Afterpay (ASX: APT) in a $39 billion deal which has already been labelled the largest in Australian corporate history.
Under the terms of the all-scrip offer, Afterpay shareholders will receive 0.375 shares of Square class A stock for every share they own, or around of $126.21 per Afterpay share based on the company’s closing price last week.
The implied price is roughly equal to 42 times Afterpay’s 2021 revenue, and Australian shareholders would own about 18.5% of the combined company.
Afterpay co-founders Anthony Eisen and Nick Molnar will each receive $2.7 billion in Square shares for their Afterpay shares which they will be able sell on the US or Australian market.
Once the acquisition is complete in the new year, they will join Square and help lead Afterpay’s merchant and consumer businesses as part of Square’s Seller and Cash App divisions.
The deal – which was reportedly six months in the making – will create an online payments powerhouse and help accelerate Afterpay’s growth in the US which, according to its latest annual figures, nearly tripled for the period to $8.15 billion.
It should also help boost Cash App’s annual user base of 70 million with the addition of Afterpay’s 16 million users.
“Square and Afterpay have a shared purpose… 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,” Mr Dorsey said.
“Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.”
Since its founding in 2009, Square has morphed into a fintech offering payments processing, analytics and sales, inventory and employee management tools, basic banking services and short-term loans to its merchants.
It also helps customers to develop online stores, rewards programs, customer relationship management systems and marketing campaigns.
The San Francisco-based company already offers instalment loans, which Mr Dorsey said had been a “powerful growth tool” for its customer base of predominantly small and medium-sized enterprises.
It recently launched banking operations including cheque and savings accounts for small businesses, and the addition of Afterpay is expected to give it a chance to expand into consumer lending which it doesn’t currently offer.
Square reported a jump of more than 143% in its total net revenue for the June quarter to $4.68 billion, compared to $1.92 billion last year.
Global customer base
Established in 2014, Afterpay has millions of global customers and tens of thousands of merchant partners across Australia, US, Canada, UK and New Zealand.
Its business model is free for customers who pay on time and encourages people to spend responsibly without incurring interest, fees or extended debt.
Afterpay markets itself as “empowering customers to access the things they want and need”, while allowing them to maintain financial wellness by splitting online and in-store payments into four instalments.
In April, the company announced it would seek a listing on the NASDAQ exchange in an effort to build its US business.
While Afterpay’s board has unanimously recommended the Square buy-out offer to shareholders, it is yet to be seen if they agree.
Analysts have been quick to point out the offer is below Afterpay’s share price peak earlier this year and its growth is much faster than that of the US company.
In June, Australia’s lucrative BNPL sector was priced collectively at more than $30 billion, with Afterpay and Zip (ASX: Z1P) accounting for the bulk of the valuation.
Generally seen as a low-commitment, user-friendly and budget-focused payment option, BNPL providers have found favour with tech-savvy millennial and Gen Z consumers who shy away from the high interest rates and strict requirements of traditional banking services such as credit cards.
BNPL offers the same benefit as credit cards, minus the commitment and interest fees.
Users can start using the services instantly without any application processes or background checks and they can defer payments for longer periods than monthly credit card billing cycles, which means more freedom in managing cashflows.
Research from last year shows US consumers spent more than $27.3 billion using BNPL platforms, with spending expected to top $1.36 trillion globally by 2025.