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 (NYSE:SQ)'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 (NYSE:MA) Inc, 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 Ltd (HK:0700), which paid A$300 million for 5% of Afterpay in 2020, will pocket A$1.7 billion.
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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.
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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)