Square Agrees To Acquire Afterpay For $39 Billion

Square Inc. has agreed to an all-stock deal worth around $39 billion to acquire Afterpay Ltd., an instalment-payment company that positions its service as a cheaper and more responsible alternative to a credit card.

The deal illustrates how financial technology companies want to challenge big banks by using scale to offer more products and take advantage of shifts in consumer behaviour that have been accelerated by the Covid-19 pandemic.

Square said a key attraction of the deal was a growing wariness toward traditional credit among younger consumers, a group that has been particularly hard hit by the pandemic as lockdowns to contain the spread of the coronavirus crushed many hospitality and casual jobs.

Afterpay’s technology allows users to pay for goods in four, interest-free instalments, 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 is 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 and shunned credit cards. 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. 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 instalment loans through Cash App, Square’s digital payment services that allows people to store and transfer money like 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, and 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 US$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.)

Instalment 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 jeweller’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 jewellery to school friends, learning lessons he later used to launch U.S. online jeweller known then as Ice.com in Australia.

Afterpay has been expanding across the U.S. through deals with retailers including Anthropologie and Free People. 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. PayPal Holdings Inc.’’s so-called Pay-in-4 product mimics Afterpay in that it allows shoppers to pay in four, interest-free instalments, but it 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 it 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 will launch an Afterpay-labeled bank account in October in partnership with Westpac Banking Corp., 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 chief financial officer, Amrita 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 Wall Street 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.”

While golden visa schemes proliferate, Switzerland remains famously protective about buying property in the country.

Rules known as Lex Koller, introduced in 1983, prohibit foreigners from buying homes in cities like Geneva and Zurich. And in the few locations where foreigners can buy, purchase permits come with rules around size and occupancy.

But non-Swiss buyers who have coveted an Alpine home now have a pathway to ownership, and it’s likely to come with financial upside. The Swiss government has waived residency requirements in a handful of locations where developers have negotiated exemptions in exchange for billions of dollars of investment in construction and improvements.

Andermatt, a village 4,715 feet above sea level in the centre of the Swiss Alps, is the largest municipality to open up to foreign buyers.

Its main investor, Egyptian magnate Samih Sawiris, “believed Andermatt could become a full-town redevelopment when he first visited in 2005, but the key was to offer real estate to people outside of Switzerland,” said Russell Collins, chief commercial officer of Andermatt-Swiss Alps, Sawiris’s development company.

“We became the only large-scale real estate development in Switzerland with an exemption from the Lex Koller regulations.”

In the ensuing decades, Andermatt has become a major draw for high-net-worth buyers from around the world, said Alex Koch de Gooreynd, a partner at Knight Frank in London and head of its Swiss residential sales team.

“What the Andermatt-Swiss Alps guys have done is incredible,” he said. “It’s an impressive resort, and there is still a good 10 years’ worth of construction to come. The future of the resort is very good.”

Andermatt’s profile got another boost from the 2022 acquisition of its ski and resort operations by Vail Resorts, which runs 41 ski destinations worldwide.

“Vail has committed to 150 million Swiss francs (US$175 million) in investments, which is another game-changer,” de Gooreynd said.

“If you’d asked me about Andermatt 10 years ago, I would have said the ski areas weren’t good enough of a draw.”

Along with the five-star Chedi Andermatt hotel and residences, which opened in 2013, residential offerings include the Gotthard Residences at the Radisson Blu hotel; at least six branded residences are planned to open by 2030, according to Jeremy Rollason, director for France, Switzerland, and Austria at Savills Ski.

“Most of these are niche, boutique buildings with anywhere from eight to 14 units, and they’re releasing them selectively to create interest and demand, which has been a very successful approach,” he said.

“Andermatt is an emerging destination, and an intelligent buy. Many buyers haven’t heard of it, but it’s about building a brand to the level of Verbier, Courchevel or Gstaad.”

The Alpinist, Andermatt’s third hotel residence, is slated to open in 2027; with 164 apartments, the five-star project will be run by Andermatt-Swiss Alps, according to Collins.

Other developments include Tova, an 18-unit project designed by Norwegian architects Snohetta, and La Foret, an 18-apartment building conceived by Swiss architects Brandenberger Kloter.

Prices in Andermatt’s new buildings range from around 1.35 million francs for a one-bedroom apartment to as much as 3.5 million francs for a two-bedroom unit, according to Astrid Josuran, an agent with Zurich Sotheby’s International Realty.

Penthouses with four or more bedrooms average 5 million-6 million francs. “Property values have been increasing steadily, with an average annual growth rate of 7.7% in the last 10 years,” she said.

“New developments will continue for the next 10 years, after which supply will be limited.”

Foreign buyers can obtain mortgages from Swiss banks, where current rates hover around 1.5% “and are declining,” Josuran said.

Compared to other countries with Alpine resorts, Switzerland also offers tax advantages, said Rollason of Savills. “France has a wealth tax on property wealth, which can become quite penal if you own $4 million or $5 million worth of property,” he said.

Andermatt’s high-end lifestyle has enhanced its appeal, said Collins of Andermatt-Swiss Alps.

“We have three Michelin-starred restaurants, and we want to create a culinary hub here,” he said. “We’ve redeveloped the main shopping promenade, Furkagasse, with 20 new retail and culinary outlets.

And there is a unique international community developing. While half our owners are Swiss, we have British, Italian and German buyers, and we are seeing inquiries from the U.S.”

But Andermatt is not the only Swiss location to cut red tape for foreign buyers.

The much smaller Samnaun resort, between Davos and Innsbruck, Austria, “is zoned so we can sell to foreigners,” said Thomas Joyce of Alpine property specialist Pure International.

“It’s high-altitude, with good restaurants and offers low property taxes of the Graubunden canton where it’s located.”

At the Edge, a new 22-apartment project by a Dutch developer, prices range from 12,000-13,500 francs per square metre, he said.

As Andermatt’s stature grows, this is a strategic time for foreigners to invest, said Josuran of Sotheby’s.

“It might be under the radar now, but it’s rapidly growing, and already among Switzerland’s most attractive ski locations,” she said. “Now’s the time to buy, before it reaches the status of a St. Moritz or Zermatt.”

Square Agrees To Acquire Afterpay For $39 Billion

Becoming the largest acquisition in Australian history.

The government in Switzerland has waived residency requirements in a handful of locations, including one that’s growing fast.