Sector overview: Australia’s buy now, pay later sector to see further scale-driven M&A - Analysis

20 August 2020 - 04:03 am UTC


This is an overview of the buy now, pay later (BNPL) sector in Australia, which will continue to undergo consolidation, according to advisors and dealmakers polled by Mergermarket journalist Christel Thunell. This overview features insights on the sector, investment rationale, recent deals and a selection of companies to watch.

 

There is no stopping buy now, pay later (BNPL) solutions, as consumers continue to ditch credit cards in favour of interest-free instalment payments, with COVID-19 adding fuel to the fire. Australia’s BNPL sector will continue to see M&A activity driven by providers seeking scale in order to attract more and bigger merchants, dealmakers interviewed by Mergermarket said.

 

Homegrown giants Afterpay [ASX:APT] and Zip Co [ASX:Z1P] have been active in M&A internationally - Afterpay acquired UK-based ClearPay in 2018 and more recently Zip acquired New York-based QuadPay earlier this year. Equally, we could see overseas players look at Australia, which has more of its fair share of BNPL companies, said Ryan Whitelegg, Managing Director at advisory firm Henslow.

 

The number of BNPL players in the Australian market are constantly increasing with “new entrants every week”, and many of these are unlikely to reach scale without consolidation, said Flexigroup [ASX:FXL] CEO Rebecca James. There are even niche BNPL providers, such as Brighte, focused on home improvements and solar installations financing, and Art Money, focused on art financing.

 

“You need critical mass of consumers on your platform, otherwise you don’t meet the requirements of the merchants. We will see consolidation of the market over the next few years”, said Openpay [ASX:OPY] CEO Michael Eidel.

 

Crowded small-ticket space

 

According to an IBISWorld report, Australian BNPL revenue amounted to AUD 680m (USD 488m) in FY20 and is expected to grow to AUD 1.1bn by FY25. Nearly two million Australians used a BNPL product last year and BNPL grew from 3% of all ecommerce payments in 2018 to 8% in 2019, according to research from Worldpay published in April. The local market will double in the next three years, the research predicted.

 

“There is a growing affection for and trend towards purchases via instalments. People aren’t just using it for quick fashion, they love that there is no interest and they can pay in instalments, and are using it to finance bigger things”, Flexigroup's James said.

 

BNPL solutions keep gaining ground at the expense of credit cards, which are shunned especially by younger consumers, according to Tommy Mermelshtayn, Chief Strategy Officer at Zip Co. “Millennials dislike credit cards. You can’t get credit cards if you’re below a certain age, it’s a complicated application process done with financial institutions, they have an aversion to interest, annual fees, and payment processing fees – they don’t know how much it’s actually going to cost”, Mermelshtayn said.

 

Most providers play in the small-ticket space, financing purchases of under AUD 1,000, so M&A activity is more likely to occur there, both James and Payright co-founder and joint CEO Piers Redward said.

 

COVID catalyst

 

The rise and rise of BNPL has been catalysed by the COVID-19 pandemic, both due to increased online retailing and consumers looking for alternative ways to finance purchases, Henslow's Whitelegg and the executives agreed.

 

COVID-19 has also driven people to re-evaluate the credit cards they have, James added. “A lot of people in Australia and New Zealand are addicted to credit cards that give them frequent flyer points, which is not as relevant anymore”, she said.

 

Afterpay’s, Zip’s, Openpay’s, Splitit’s [ASX:SPT] and Sezzle’s [ASX:SZL] share prices have all soared during the pandemic. Afterpay has been given an extra boost by Tencent’s [HKG:0700] acquisition of a 5% stake in May, worth AUD 300m. Tencent also participated in Afterpay's AUD 650m raise in July, topping up its initial investment, as reported by local media.

 

“As an industry, it looks overvalued due to hype”, Whitelegg cautioned. “But I said that two months ago and I was wrong”, he added. 

 

M&A activity in the sector would benefit from valuations coming down somewhat as companies would look for synergies through acquisitions or mergers, Whitelegg said. Most sector players cannot be valued on earnings multiples, as they are yet to turn a profit, he said, adding that revenue multiples range widely from 6-10x up to 60-70x.

 

Market entrants: Retailers, traditional lenders, neobanks

 

M&A will not necessarily be limited to the BNPL space itself. Many major retailers, the likes of Harvey Norman [ASX:HVN], Freedom, etc, are offering their own BNPL solutions, Whitelegg pointed out. Such large retailers could buy or invest in BNPL providers, to gain access to the platform as well as to customer data, Whitelegg and Openpay’s Eidel agreed.

 

Some traditional lenders, e.g. personal loans providers, are also looking to diversify by entering the BNPL space, Whitelegg continued. Neobanks looking at building out their lending book could also be keen to invest in the sector, he added.

 

Risks and regulation

 

“BNPL is a huge trend and I don’t see it reversing. But even if it’s interest-free, it may encourage people to buy something they can’t afford, which is worrying. You have to pay for it at some point”, Whitelegg pointed out.

 

Corporate regulator ASIC (The Australian Securities and Investments Commission) reviewed the BNPL sector in 2018, and pointed out several risks, including consumers becoming financially overcommitted and liable to paying late fees, buying more expensive products than they otherwise would, and spending more than they normally would. The National Credit Act does not apply to BNPL arrangements, but they are considered “credit facilities” under the ASIC Act, meaning ASIC can take action where a BNPL provider engages in misleading or unconscionable conduct, according to the report. BNPL providers could be required to comply with the National Credit Act in the future, the report further stated.

 

ASIC is preparing a follow-up report on the industry, according to a recent news article. However, the executives downplayed regulatory risk in the sector, and Zip Co, Flexigroup and Payright executives all said they are engaging with ASIC and are working with other providers on an industry code of conduct to be launched on 1 January.

 

A draft code of conduct was heavily criticized by ASIC as lacking consumer protections compared to national credit laws, according to a news report from June.

 

Below is a summary of companies in the BNPL space that Mergermarket has covered or is watching:

 

  • Afterpay announced an AUD 800m capital raising in July, among other things to create capacity to execute on potential M&A opportunities to accelerate roll-out in potential new international markets. Tencent took a 5% stake in Afterpay in May, at an AUD 300m value. Afterpay’s market cap stands at AUD 22.8bn.
  • Zip Co will keep looking at targets after its USD 269m enterprise value acquisition of New York-based QuadPay, the company told Mergermarket in June. Zip, with a market cap of AUD 2.5bn, is focused on its current markets, Australia, New Zealand, the US, the UK and South Africa.
  • Flexigroup will assess targets on an opportunistic basis, for any of its three business areas i.e. BNPL, interest-free credit cards, and SME lending, CEO Rebecca James told Mergermarket in June. However, the company is more likely to pursue M&A in two years’ time, once its current transformation strategy has been implemented. Flexigroup, with an AUD 481m market cap, has two BNPL brands, Humm and Bundll. Mergermarket previously reported in 2018 that Flexigroup was a likely target for private equity amid M&A activity in the sector.
  • Latitude offers BNPL brand LatitudePay, among other services including personal loans, credit cards, and insurance. The company, backed by Varde PartnersKKR and Deutsche Bank, called off its AUD 3bn IPO in October last year, a month before its planned listing, after concerns about aftermarket performance of the shares. Latitude was reported to be eyeing Zip Co earlier last year, which was denied by Latitude.
  • Openpay will consider M&A partnerships with smaller providers in Australia and overseas, CEO Michael Eidel told Mergermarket in May. The AUD 403m market cap company also operates in New Zealand and the UK. Openpay could also create partnerships with large e-commerce platforms to scale globally, and such partnerships could have an M&A element, the CEO said.
  • Payright is considering an IPO as part of its continued fundraising, co-founder and joint CEO Piers Redward told Mergermarket in July. The company recently raised an AUD 12m Series D, and has raised AUD 60m in total over the past 18 months.
  • Limepay, a provider of a white-labelled BNPL platform, is planning a Series A of more than AUD 6m later this year, which will be used to expand to overseas markets such as the US and the UK, the company told Mergermarket in May.
  • Sezzle, headquartered in Minneapolis, Minnesota but listed on the ASX, is more attractive to potential acquirers now that QuadPay, one of its largest US-based competitors, has been acquired, the company told Mergermarket in June. In a previous Mergermarket report from last year, the company said it was mulling acquisition opportunities. The AUD 1.5bn market cap company raised AUD 79.1m via a placement last month.
  • Splitit, New York-headquartered but listed on the ASX with an AUD 562m market cap, announced an AUD 90m placement earlier this month. The company does not have an active acquisition strategy, as far as Mergermarket is aware.
  • Laybuy, based in New Zealand, is looking to raise AUD 80m in an ASX IPO, targeting a market cap of AUD 246m. The shares are to start trading on 7 September.
  • Brighte, specialized in BNPL for home improvements and solar installations, raised AUD 15.5m in October last year. The company has no current plans for a capital raise or exit, CEO and founder Katherine McConnell told Mergermarket.
  • Art Money, specialized in BNPL for artwork, is in an AUD 5m pre-IPO funding round advised by Acova Capital, according to a recent news report.