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Australian installment-payment company positions its service as a cheaper, more responsible alternative to a credit card

SYDNEY— Square Inc. SQ -3.14% has agreed to acquire Afterpay Ltd. APT 18.77% in an all-stock deal worth around $29 billion, illustrating how financial technology companies are seeking scale to challenge banks for a bigger slice of the payments industry.

Square said a key attraction of the deal was a growing wariness toward traditional credit among younger consumers, a group particularly hard hit by the Covid-19 pandemic, as lockdowns crushed many hospitality and casual jobs.

Afterpay’s technology allows users to pay for goods in four, interest-free installments while receiving the goods immediately. Customers pay a fee only if they miss an automated payment, a transgression that also locks their account until the balance is repaid. Australia-based Afterpay, which has yet to turn a profit, says this limits bad debts, particularly in a downturn when job security is shaky and household finances are stretched.

Most of Afterpay’s revenue comes from retail merchants, which pay a percentage of the value of each order placed by customers, plus a fixed fee.

“Square and Afterpay have a shared purpose,” said Jack Dorsey, Square’s chief executive. “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.”

U.S. consumers flocked to buy-now-pay-later services like Afterpay during the pandemic. But credit cards appear to be coming back in favor. Demand for general-purpose credit cards rose sharply in April compared with the same period last year, according to credit-reporting firm Equifax Inc. EFX -0.00% Lenders issued more general-purpose credit cards than any other March going back to at least 2010, Equifax said.

The Afterpay deal is Square’s biggest ever. Square has been looking for ways to tie its Cash App and seller ecosystems more closely together, Mr. Dorsey said on a call with analysts earlier this year.

The Afterpay deal is a big step in that direction. Square, best known for its signature white card reader that plugs into phones and tablets, plans to add Afterpay as a financing option through the smaller merchants it serves. Afterpay customers will be able to make payments on their installment loans through Cash App, Square’s digital payment services that allows people to store and transfer money as they would at a bank. And Cash App customers, Square said, will be able to use the app to find merchants that offer Afterpay’s buy-now-pay-later financing.

Cash App’s growth exploded over the past year, largely the result of a flood of pandemic stimulus payments. Users deposited their stimulus checks with Cash App, then used the service to send money to friends and family, make purchases online with their Cash App debit cards and buy bitcoin and stocks through Cash App Investing.

In June, Cash App reached 40 million monthly transacting active customers. The Cash App business had gross profit of $546 million in the second quarter, the company said in an earnings report released ahead of schedule Sunday. That is a 94% increase over the second quarter of 2020 and just shy of the $585 million gross profit Square’s bread-and-butter seller business recorded in the second quarter. (Gross profit is revenue minus the cost of goods or services sold, excluding taxes and other fixed costs.)

The strategic rationale for the business combination is sound in our view.— Phillip Chippindale, an analyst at Ord Minnett

Square Chief Financial Officer Amrita Ahuja forecast online payment volumes will hit $10 trillion by 2024, with buy-now-pay-later installments taking an increasing share.

Installment lending isn’t an entirely new business for Square. In 2017, the company began offering financing options to consumers through its business clients that also used Square to send and manage their invoices. But the service never really took off.

Afterpay, Australia’s largest tech company by market capitalization, said the deal implies a value of around 126.21 Australian dollars, equivalent to $92.66, for each of its shares, representing a 31% premium to its closing price on Friday.

Afterpay said its shareholders will receive 0.375 share of Square Class A common stock for each Afterpay share that they own. It expects Afterpay shareholders will own around 18.5% of the combined company when the deal completes.

“The Square-Afterpay transaction looks close to a done deal, in the absence of a superior proposal,” said Phillip Chippindale, an analyst at Ord Minnett, an Australian investment bank. “The strategic rationale for the business combination is sound in our view.”

Afterpay was co-founded in 2014 by Nick Molnar, a jeweler’s son who wanted to break a cycle that involved some people getting deeper into debt with credit cards that they later struggled to pay off.

“I had just turned 18, and I was told, ‘Don’t spend money you don’t have,’” Mr. Molnar told The Wall Street Journal last year, recalling an era of bank bailouts, company collapses and residential repossessions.

Afterpay is Mr. Molnar’s second business foray. The 31-year-old first sold jewelry to school friends, learning lessons he later used to launch U.S. online jeweler known then as Ice.com in Australia.

Afterpay has been expanding across the U.S. through deals with retailers, including Anthropologie and Free People, and recently launched a virtual-card function that allows users to pay anywhere. In Australia and New Zealand, 3.6 million people—more than one in seven adults—have an Afterpay account.

Mr. Molnar and co-founder Anthony Eisen said combining with Square will accelerate Afterpay’s growth in the U.S. and globally. The company’s growth has attracted larger payments companies to push into the buy-now, pay-later sector, while some banks are now offering installment plans for purchases. PayPal Holdings Inc.’s PYPL -2.70% so-called Pay-in-4 product mimics Afterpay in allowing shoppers to pay in four, interest-free installments but is cheaper for merchants than Afterpay.

Heightened competition could give merchants more bargaining power over fees, while many analysts think Afterpay’s growth will start to attract more scrutiny from regulators.

Afterpay skirts the definition of a loan under some U.S. laws so isn’t subject to the same regulation. The state of California reached a settlement with Afterpay in April last year, however, over what it said were illegal practices, requiring the company to refund $900,000 to consumers.

Rising competition has led Afterpay to trial new products that it hopes will prevent merchants and customers from switching providers. In June, Afterpay introduced a loyalty program and said it would launch an Afterpay-labeled bank account in October in partnership with Westpac Banking Corp. WBK -1.54% , Australia’s second-largest bank. Analysts say linking repayments to a bank account will reduce the slice of transactions collected by credit and debit card companies, supporting margins.

Mr. Molnar said he got to know Mr. Dorsey through his philanthropic activities, while Square’s Ms. Ahuja, was an early contact after he moved to San Francisco. Talks began over a partnership with Square but later progressed to a takeover, he said.

“I feel we’ve lived parallel lives as entrepreneurs,” Mr. Molnar told the Journal after the deal was announced. “To see an opportunity of millions of Square sellers as well as 70 million active Cash app consumers to be added to the portfolio of how we drive growth together, it’s an incredibly exciting opportunity.”

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All-stock deal in fast-growing fintech sector is largest in Australia’s history

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in an all-stock deal worth about $29bn.

According to a joint statement released on Sunday, Afterpay shareholders will receive 0.375 shares of Square stock for every share they own, representing a 30 per cent premium based on the most recent closing prices for both companies.

The transaction is expected to be completed in the first quarter of 2022. The deal would be the largest in Australian history, trumping Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The company said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, “Pay in 4”, while last month it was reported that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. 

“Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Afterpay said its services are used by more than 100,000 merchants across Australia, the US, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

“Square and Afterpay have a shared purpose,” said Square chief executive Jack Dorsey, who is also Twitter’s CEO. “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.”

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

Electric vehicles: recycled batteries and the search for a circular economy

The explosion in demand for EVs has spurred a quest for alternative sources of key metals such as cobalt and nickel

Lucrative gains and the opportunity to bypass overcrowded IPOs seen as some advantages

Hedge funds are looking to buy in to unlisted companies, betting that an area of the markets that has wrongfooted the industry in the past can now provide them with the kind of lucrative gains enjoyed by private equity rivals.

High-profile executives such as Third Point’s Daniel Loeb, Marshall Wace’s Paul Marshall and BlueCrest Capital’s Mike Platt are among those who have spotted the opportunity. They are now seeking to invest directly in fast-growing companies, particularly in the technology sector, that are staying private for longer and can already be richly valued before they float.

Marshall Wace is launching two portfolios to invest in the healthcare and digital assets sectors, the first time it has launched vehicles for outside investors to buy into private companies. Third Point has been looking to raise about $300m for its first dedicated venture capital fund and has completed its first close, said a person familiar with the fund.

Platt, one of the world’s most successful macro traders whose firm is now a private family office, told the Financial Times that US private equity investment was now “a significant focus” for him. Paul Singer’s Elliott Management, already a longtime private equity investor, said in a letter to investors this year seen by the FT that taking stakes in private companies and public-to-private deals represented some of the best investment opportunities at the moment. 

“The best public market investors now have to be participating or at least aware of the action in private markets, or else they have a huge blind spot,” said Cutler Cook, managing partner at investment firm Clay Point Investors. “Some of the savviest investors have realised that, with public markets where they are, the opportunities to outperform are so much better in private markets.”

The interest in private assets comes on the back of huge gains reaped by some so-called Tiger cubs — protégés of Julian Robertson’s famed Tiger Management — such as Tiger Global’s Chase Coleman, Viking’s Andreas Halvorsen and Maverick’s Lee Ainslie. All are long-time backers of unlisted companies and have made tens of billions of dollars from these investments.

Many hedge fund managers, who have traditionally invested in public markets, have also been looking with envy at the returns, fees and investor inflows enjoyed by the private equity and debt industries in recent years. Assets in private capital have risen from just over $2tn in 2010 to more than $7tn at the end of last year, according to Morgan Stanley. The hedge fund industry has grown from $1.9tn to $3.6tn over that period, according to HFR, and performance has often been lacklustre.

This is not the first time that hedge funds have expanded into private equity and unlisted companies. Before the 2008 financial crisis some managers bought into private companies to juice up returns. That move backfired spectacularly when the crisis hit and many such assets became tough to sell, just as investors were demanding their money back.

Some managers put these assets into special vehicles, which often took years to wind down. Last year, the FT reported that a GLG Partners fund created out of assets bought by star manager Greg Coffey before the crisis, including a large stake in a Siberian coal mine, had only recently made the final payments back to investors.

This time, managers argue that funds have done a better job matching the assets they hold to investors’ ability to withdraw their cash. And while some funds have put the investments into their more liquid hedge funds, others such as Coatue and Tiger Global have gone on to develop separate private equity funds with longer investor lock-ups.

A key reason for investing in both public and private companies is the additional information hedge funds believe they can glean, which can help inform other investment decisions. Unlike public companies, which are subject to strict reporting rules, private companies can provide them with much more information, not only on their own performance but also on metrics such as sales and margins across the sector.

“If you analyse public and private companies, you see the whole picture,” said Christian Vogel-Claussen, managing partner at London-based hedge fund Alanda Capital. The firm, which takes a similar investing approach to some of the Tiger cubs, has bought into companies such as debit card company Marqeta, TikTok owner ByteDance and digital banking firm Revolut.

Third Point founder Loeb wrote in an investor report seen by the FT that “the feedback loop between private and public markets has never been as pronounced as it is today”.

Managers also argue that by investing in private companies they can get ahead of overcrowded IPOs. Some have found more opportunities to do so during the coronavirus pandemic, when the economic hit from lockdowns put off some private equity firms from committing capital. New York-based hedge fund Kora Management, for instance, said it was able to invest in Indian food delivery company Zomato in the third quarter of last year when “the capital cycle was not as favourable”. The stock soared on its debut in July.

“At an IPO there’s little chance, as a hedge fund, to get an allocation — therefore you must have exposure earlier,” said Alanda’s Vogel-Claussen.

Cédric Fontanille, head of investment mandates at Unigestion, said hedge funds had identified a “sweet spot” in smaller private firms “that are outside the range of the big private equity funds and are maybe a little less looked at by private equity”.

However, some in the industry see more pragmatic reasons for the switch into private investments.

Whereas hedge funds can be undone by one bad trade or quarter of performance, private equity managers lock up investors’ capital for far longer and are judged over much longer periods. According to one industry insider, taking such a long-term approach offers far less “career risk”.

Sydney-based group received sweetened A$21bn bid from Australian oil and gas producer

Sydney-based Oil Search has accepted a revised A$21bn (US$15.4bn) merger offer from fellow Australian company Santos that would create one of the 20 biggest oil and gas companies in the world.

Under the sweetened Santos offer, Oil Search shareholders would own 38.5 per cent of a combined company with a portfolio of oil and gas assets spanning Australia, the Pacific and the US.

The new offer, which was disclosed on Monday, represented a 6.5 per cent premium on Santos’s original merger proposal on June 25, which was rejected by Oil Search’s board last month.

Oil Search told investors there was strategic logic to the merger, which would create a regional energy champion in the Pacific. The company’s board said it planned to unanimously recommend the offer in the absence of a superior proposal.

Oil Search shares surged more than 5 per cent to A$4.01 on the Australian Securities Exchange.

Analysts said Oil Search’s rapid U-turn on the merger proposal reflected the company’s weakened position following recent management turmoil and concerns about its expansion in Alaska.

“Oil Search’s board has raised the white flag, having been weakened in the wake of management churn and governance concerns, and pressured into a merger by increasingly frustrated investors,” said Saul Kavonic, an analyst at Credit Suisse.

“The acceptance of the offer can essentially be viewed as a capitulation by Oil Search that their Alaska asset is not worth what they hoped it would be.”

Oil Search chair Rick Lee announced last month that chief executive Keiran Wulff had resigned for health reasons, but added the board had also received complaints about his behaviour. Lee had faced criticism from investors following his failure to disclose Santos’s initial approach to Oil Search during an investor day.

Oil Search and Santos each own stakes in PNG LNG, a highly profitable liquefied natural gas facility in Papua New Guinea that is operated by ExxonMobil.

Neil Beveridge, an analyst at Bernstein, said Santos’s offer for Oil Search could elicit interest from ExxonMobil or Total, both of which have assets in PNG.

“I think acceptance of this offer could trigger both of these companies to evaluate whether or not they will bid [for Oil Search],” he said.

“Going back a few years, I think it would be almost inevitable that you would get both of those companies interested. I think the question now is in the current era, where oil majors are more willing to divest assets than acquire assets, is there an appetite there for a counterbid.”

Country boss expects up to 100,000 cumulative deliveries of ID models by end of year

Volkswagen’s head of China has said the group will recover from a tepid launch of its electric models in the world’s largest car market, after fierce competition resulted in a disappointing early sales.

The world’s second-largest automaker delivered a total of 1.84m cars in China in the first half of the year, a rise of 16.2 per cent over the same period last year and just below the 1.92m units for 2019. VW’s premium brands Audi and Porsche notched record sales during the period.

But the group’s ID series of electric vehicles has failed to replicate its success in Europe in China, marking a setback for the global automaker’s €35bn electrification strategy.

“China is by far the most competitive [electric car] market in the world,” meaning that a new model needs six to eight months to establish sales, said Stephan Wöllenstein, chief executive of the Volkswagen Group China.

He added that the group expected cumulative deliveries of about 80,000 to 100,000 units across all ID models by the end of the year.

VW’s two ID.4 sport utility vehicle models, which were launched in March as the centrepiece of the group’s electrification strategy in China, reached just over 2,900 deliveries in June.

While an improvement over April and May sales, the figure is far below that for top-selling models. Tesla’s Model 3 and Model Y deliveries were 16,515 and 11,623 respectively that month. 

Yale Zhang, founder of Shanghai-based consultancy Automotive Foresight, said the ID models had failed to match local consumer expectations for electric car models for them to be distinct from traditional vehicles and come with a range of smart features.

“They look like a traditional vehicle. That’s fine in Europe, but not in China, because there are so many competitors with new models, whether from local EV start-ups or a localised Tesla,” he said.

China’s total electric vehicle sales have soared in the first half of 2021, with 1.2m cars being delivered, about the same as in all of 2019. After years of hovering at about 5 per cent of total automobile sales, the segment now routinely accounts for more than a tenth of total monthly deliveries. 

The government has set a goal for electric vehicles to account for 20 per cent of new sales by 2025. Deutsche Bank analysts forecasted in a note this week that sales in China of battery-powered electric vehicles could double this year to more than 2m units.