Afterpay – Klarna CEO Chides Founders for Early Exit

Klarna’s Long Time CEO is ‘Surprised’ by Afterpay founders Exit

Klarna CEO Sebastian (Seb) Siemiatkowski is no stranger to a lengthy struggle – he’s been at the forefront of BNPL apps since 2005. So I guess you can understand his surprise when Afterpay sells to Square – after a mere seven years.

Truth is Klarna and Afterpay don’t like each other and have partaken in a wars of words on a number of occasions, so Seb cannot resist one last opportunity to ‘needle’ the Afterpay founders as he did yesterday on CNBC.

Afterpay’s US$29 billion exit is exquisite timing and sets the record for Fintech to Fintech purchases, how long this is the benchmark is anyone guess.

The timing is perfect as the Online trade unwinds; before major BNPL competition ramps up and regulation catches up with the totally unregulated BNPL niche.

The flip side is if (and it’s a big if) Square can build a payments company to match PayPal, the Afterpay founders will be green with envy.

AFTERPAY ALREADY PEAKED IN AUSTRALIA/NEW ZEALAND

Afterpay’s ANZ business has peaked and is showing signs of decline – sales in Q3 & Q4 were down 3.3% versus the first half of 2021 – Q3 was a disaster down 18.6% on Q2, all signs of a maturing niche which is still very small, yet provides 50% of revenue.

RBA figures show BNPL annual sales at $11 billion in March 2021 – that’s 1.5% of credit/debit/prepaid cards and less than 1% of the $1.5 trillion retail payments market in Australia.

US sales for the second half are the slowest ever at 31%, while the UK lags badly behind given it was Afterpay’s first off shore market in 2018 and is the No 3 Online market globally -?this chart shows how badly Clearpay is doing in the UK.

Note - Afterpay Australia has to trade in Europe as Clearpay, as it doesn’t own the brand or naming rights – those belong to Afterpay NL a 2010 Dutch start-up now owned by Bertelsmann and you wouldn’t want to mess with them.?

All of this may not matter - expect Square to ditch the Afterpay brand, there is only room for one brand and that is Square.

KLARNA STILL THE LEADING SINGLE PURPOSE APP

Klarna boasts 20 million US customers vs Afterpay 10.5 million, both pale into insignificance vs PayPal and other major competitors entering the BNPL niche.

Seb should be pleased with this deal as it potentially will drive Klarna’s valuation higher in the next funding round, well above US$46 billion set in June 2021.

However the heavy competitive artillery is coming over the horizon and will impact results from later this year. PayPal, Citi/Amazon, Amex, Visa, Chase are among the names these single purpose BNPL apps will now face in US.

SQUARE SHAREHOLDERS TAKE THE RISK

Squares all script offer for Afterpay amounts to 26% of market cap before the offer.(Square’s stock increased a modest 11% on day one).

Squares shareholders are now asked to absorb a mammoth US$300,000 cost of acquisition for every merchant; or $1790 per customer or whatever mix you like. These are multiples well above anything paid for any payments company.

Square will look to roll out BNPL across its 70 million Cash app users.

Afterpay’s 2021 sales per customer $1302 or $108 per month - revenues are a very modest $59 per customer per year.

Afterpay’s sales per merchant is $17,905 per month.

No wonder this business has never made a profit and has accumulated losses to YE 2020 of $196 million.

FINTECH VALUATIONS OFF THE WALL

Stripe has a valuation of US$95 billion, Klarna US$46 billion, Revolut US$33 billion, NuBank US$30 billion all in the payments space. VC investors would expect a considerable premium on their investment once they exit.

Four out of the top 10 Unicorns are Fintech’s just as Visa, MasterCard and PayPal are in the top 20 S&P stocks in the USA.

Private Fintech’s raised US$30 billion in Q2 of 2021 – a record which also demonstrates the M&A heat is on, with VC’s desperate to fund their Unicorns.

A number of VC’s invested in non-public BNPL apps are claiming public app companies have not maintained their investment levels and this will play out over time – Affirm which went public earlier this year could be cautionary tale as its share price is stuck just above its issue price US$47.

Payments are always very important and valuable companies in both the VC/Private Equity space and equity markets. Afterpay at US$29 billion is at the top end of this and it now depends on how Square are able to leverage the business.

A link below for a very good article on Square -?

“Exquisite timing”: Square lobs record $39bn offer for Afterpay

?BANKING DAY George Lekakis August 3rd

Afterpay’s army of Australian investors are set to join the share register of the Nasdaq-listed Square merchant payments business if a A$39 billion (US$29 billion) merger deal is completed early next year.

The deal is set to be the largest buyout of an ASX-listed company, trumping the $33 billion sale of Westfield to France’s Unibail-Rodamco in 2017.

Square and Afterpay announced the blockbuster transaction on Monday, saying they planned to combine their operations by the end of March to create a “compelling” payments business aimed at both consumers and merchants.

Under the deal, which has unanimous backing from the Afterpay board, Square is proposing to acquire the buy now pay later provider with an all scrip offer that would leave the target’s shareholders with an 18.5 per cent interest in the combined entity.

Square founder and CEO Jack Dorsey said his company would apply for a secondary listing on the ASX to accommodate Afterpay’s Australian-based shareholder base.

“Square and Afterpay have a shared purpose,” Dorsey said.

“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.”

The deal is contingent on a raft of conditions, including approval from the Australian Taxation Office for capital gains tax rollover relief for Afterpay shareholders.

It also requires approval from shareholders of both companies and a green light from Federal Treasurer Josh Frydenberg.

Australian payments experts have been highlighting strategic weaknesses in the business models of domestic BNPL schemes in recent months and many believe that the buyout deal is a silver bullet for Afterpay.

“The timing is exquisite,” said Grant Halverson, principal of McLean Roche.

“Afterpay sales volumes appear to have peaked in Australia and New Zealand.

“Most investment analysts seem to have overlooked that there was an 18 per cent decline in sales in Australia and New Zealand in the March quarter.”

Sydney payments consultant Bradford Kelly said Afterpay had a strategic interest in selling the business because it did not have scale in the US market and faced material challenges from the likes of Citibank, PayPal and Commonwealth Bank in its home markets.

“The buy now pay later market is saturated in the US and Afterpay is staring at competition from the world’s largest payments company and Australia’s largest bank,” he said.

“That makes it a good time to sell.”

Square’s offer values Afterpay scrip at $126.21, which means that investors who bought into the company in January and February when the share price was trading above $140 will be out of the money.

Halverson believes Afterpay shareholders will wear most of the risk if the deal proceeds because future returns will hang on Square being able to execute its ambitious global strategy.

Afterpay co-founder and CEO Anthony Eisen talked up the accretive benefits of the deal for his shareholders.

“The transaction marks an important recognition of the Australian technology sector as homegrown innovation continues to be shared more broadly throughout the world,” he said.

“It also provides our shareholders with the opportunity to be a part of future growth of an innovative company aligned with our vision.”

Eisen and co-founder Nick Molnar said they would be joining the Square management team after the transaction is consummated to take up senior roles in overseeing the company’s consumer and merchant businesses.

One Afterpay director is also expected to join the Square board.

While Afterpay scrip rallied more than 25 per cent to an intra-day high of $125, it closed at $114.80 - a significant discount to the buyout offer on concerns that the deal might not proceed.

However, news of the deal appeared to trigger a rally in other ASX-listed BNPL providers, with Zip and Openpay closing up 9 per cent and 4 per cent, respectively.

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https://www.forbes.com/sites/ronshevlin/2021/08/02/why-square-acquired-afterpay-for-29-billion-merchant-and-cashapp-user-acquisition/?sh=6c67f716281d

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