US tech giant Square’s $39 billion takeover of Afterpay has sparked predictions of more merger and acquisition activity in the booming buy now, pay later (BNPL) sector, as smaller rivals brace for an even more daunting competitor.
In the aftermath of Afterpay’s record-breaking deal announced on Monday, analysts and fund managers said smaller players such as Zip Co and Sezzle could potentially become more attractive takeover targets.
That is because Square’s willingness to snap up Afterpay was seen as validation of the wider BNPL sector, which is attempting to disrupt credit cards. Joining forces with Square will also make Afterpay a tougher competitor to smaller rivals as they race to roll out BNPL products around the world.
Portfolio manager at Tribeca Investment Partners Jun Bei Liu highlighted the need for smaller players to secure capital as the payments businesses engage in a global land-grab.
“We will see a huge amount of M&A picking up,” Ms Liu said. “Capital is important, partnering is important, and a pathway to scalability in all of these markets is important,” Ms Liu said.
Portfolio manager at Ophir Asset Management Steven Ng, a long-time Afterpay shareholder, said: “The largest player in the industry with a lot of cash on the balance sheet is now merging with an even bigger partner.”
BNPL providers, such as Afterpay, offer consumers short-term loans paid back in interest-free instalments and the products have proven a hit with younger customers in particular.
Domestically, some of the key ASX-listed BNPL operators include Zip, Sezzle, and Splitit. Shares in Zip, the second largest domestic player behind Afterpay, were up 9 per cent at $7.89 on Tuesday afternoon after a strong rise on Monday. Sezzle shares were 2.7 per cent higher at $7.68 and Splitit shares were up 3 per cent at 52c.
Citi analyst Siraj Ahmed said the Afterpay deal could make Zip more appealing as a takeover target, pointing out it also has a substantial United States business, Quadpay. At the same time, Mr Ahmed said the Afterpay merger underlined the importance of scale, and teaming up with Square would give Afterpay a further advantage in the crucial US market.
“Zip could potentially reduce the scale gap by partnering,” Mr Ahmed wrote.
Zip spokesman Matthew Abbott said Afterpay’s takeover was a “huge positive” for the BNPL sector, as it validated the global opportunity. It was reported last month that European BNPL operator Klarna had taken a strategic stake in Zip.
Jarden analysts Elise Kennedy and Manroop Singh said combining Afterpay with Square’s 70 million customers would create a more formidable player to tackle the giants entering the BNPL stampede, such as PayPal and potentially Apple.
“We think this is could have important implications for BNPL providers. As well as potentially near-term heightened corporate activity risk for the industry, longer-term more competitive players could make it difficult for smaller names to compete,” the analysts wrote.
Analysts also canvassed the possibility of a rival bid for Afterpay emerging, though Jefferies analyst Roger Samuel said this was fairly unlikely in US, where PayPal is rolling out its own BNPL product.
Overseas, the deal could also put more pressure on specialist BNPL firms including US-listed Affirm and Europe’s Klarna to look at teaming up with a partner in a bid to compete more effectively.
The predictions of more corporate activity in the BNPL sector came as Square shares jumped 10 per cent on Monday (US time), with investors backing the deal. Afterpay shares, which are likely to be heavily influenced by Square’s share price, was up 12.2 per cent to $128.86 in early afternoon trading on Tuesday.
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Source: Thanks smh.com