Square To Acquire Buy-Now, Pay-Later Firm Afterpay In $29B Stock Transaction

Payments services provider Square SQ announced on Sunday night that it was acquiring Afterpay for approximately $29 billion in stock. The deal is an all-stock transaction, with Square acquiring all the issued shares of Afterpay, pending a court-approved "Scheme of Arrangement."

A Scheme of Arrangement is a U.K. court mechanism under which U.S. companies can enter arrangements with shareholders and/or creditors. It is frequently used when a takeover happens.

Square stock was up more than 8% in morning trading.

Afterpay AFTPY is one of the leaders in the growing "buy-now, pay-later" space. Founded in 2014, Afterpay allows consumers to buy and receive an item immediately with only a 25% upfront cost. The remainder of the purchase price is paid, interest-free, over the next six weeks in four equal payments. Customers with late payments are not allowed to use the app for another purchase until the debt is settled, but Afterpay notes that this prevents customers from running up large debt as occurs with credit cards.

"Square and Afterpay have a shared purpose. 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," said Jack Dorsey, co-founder and CEO of Square as well as Twitter. "Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands."

Read: Buy-now, pay-later provider Afterpay inks deals with retailers including Amazon, Target

Read: Cryptocurrencies gaining traction as e-commerce payment option

Afterpay recently inked deals with 13 major retailers to allow customers to take advantage of delayed payment options when purchasing items. Amazon AMZN, CVS CVS, Dell DELL, Kroger KR, Macy's M, Nike NIKE, Nordstrom JWN, Nordstrom Rack, Sephora, Target TGT, Victoria's Secret, Walgreens WBA and Yeti combined represent nearly half of all e-commerce volume in the country. Now, Afterpay app customers can use the app at any of these stores and websites.

The acquisition of Afterpay moves Square into the buy-now, pay-later retail segment.

"The addition of Afterpay to Cash App will strengthen our growing networks of consumers around the world while supporting consumers with flexible, responsible payment options," said Brian Grassadonia, lead of Square's Cash App business. "Afterpay will help deepen and reinforce the connections between our Cash App and Seller ecosystems, and accelerate our ability to offer a rich suite of commerce capabilities to Cash App customers."

Afterpay, based in Australia, has more than 16 million consumers and 100,000 merchants globally on its platform.

Square said the transaction will allow it to expand into new geographies and with investment, will drive incremental growth for sellers and increased engagement for Cash App customers. Cash App customers will be able to access Square's financial tools including money transfer, stock, and Bitcoin purchases.

Afterpay's co-founders and co-CEOs, Anthony Eisen and Nick Molnar, will join Square upon completion of the transaction and help lead Afterpay's respective merchant and consumer businesses, as part of Square's Seller and Cash App ecosystems. 

To coincide with the Afterpay announcement, Square unexpectedly released its Q2 earnings Sunday night. They were originally set for this Thursday. The company said it saw a 91% increase in gross profit and net revenue excluding Bitcoin of $1.96 billion, an 87% increase year-over-year. The company said its operating income was negatively impacted by $45 million in Bitcoin-related investments. Square purchased $170 million worth of Bitcoin in February, following a $50 million Bitcoin purchase in October 2020.

Bitcoin was trading at $54,181 on Feb. 22, reaching as high as $61,965 in mid-April. It opened Monday morning at about $40,000, up under $30,000 in July.

Total net revenue was $4.68 billion in the quarter, up 143% year-over-year, and gross profit in the quarter was $1.14 billion, with $546 million of that coming from its Cash App division, which was up 94% year-over-year. The Seller ecosystem generated $585 million in gross profit, an 85% increase.

Adjusted earnings before interest, taxes, depreciation, and amortization was $360 million, and net income was $204 million, up from a loss of $11 million in Q2 2020.

Cash App's investing tab, which was introduced last year, saw a threefold increase in the number of customers (4.5 million) holding a stock or ETF, the company said. Banking tab usage is also growing. In the second quarter, gross profit per monthly Cash App active customer was $55, up 2.5x from two years ago.

Subscription- and services-based revenue was $685 million in Q2, up 98% year-over-year, and services-based gross profit increased 90% to $561 million.

Operating expenses were $1.02 billion in the second quarter of 2021, up 64% year over year, and non-GAAP operating expenses were $787 million, up 57% year over year. Product development expenses were $327 million on a GAAP basis and $205 million on a non-GAAP basis in the second quarter of 2021, up 57% and 65% year-over-year, respectively.

Click for more FreightWaves articles by Brian Straight.

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Image by Joshua Woroniecki from Pixabay

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