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One-off transaction

4 August 2021 By Karen Kwok

Klarna is suddenly in the checkout shopping cart. Following the $29 billion acquisition of Australian payment company Afterpay by Twitter founder Jack Dorsey’s Square, those looking to get into the fast-growing buy-now-pay-later sector will now be eying the Swedish group and U.S. rival Affirm. Yet the list of genuine suitors may not be excessively long.

On the face of it, Klarna boss Sebastian Siemiatkowski has several reasons to sell out. Afterpay and Klarna are competing head-to-head in the business of offering no-interest short-term instalment loans to help consumers spread out the cost of paying for small purchases. The duo charge retailers a fee in return for covering the risk that shoppers don’t pay. With Square’s deep pockets, Afterpay may now be able to charge more competitive fees and grab market share.

New entrants are also massing at the pay-later market gates. Shares in Afterpay and Affirm slumped after rumours last month that $2.4 trillion Apple might launch its own product. American Express and PayPal have similar offerings, and the latter has already processed $3.5 billion since its launch in the first seven months to June. By comparison, Afterpay processed $16 billion of payment volume in the year ending June.

Still, Klarna would not come cheap. Afterpay’s Square offer is 42 times its sales for the year to end-June, factoring in a 30% premium. Affirm trades on under 22 times expected sales. Taking the average of last year’s $1.2 billion of sales and 2021’s potential $1.6 billion, adding a similar premium and assuming no debt, Klarna’s multiple could exceed Afterpay’s. Some buyers may balk at that. And Apple may prefer to develop its own “pay later” offering, especially as Klarna comes with various more humdrum banking activities.

Siemiatkowski, meanwhile, will be picky over buyers. Selling to American Express or other consumer banks could be a credibility-sapping step for a self-styled disrupter of the credit card industry. Klarna’s non-listed status may complicate a hostile takeover.

That leaves privately held Stripe, last valued at $95 billion, and $318 billion PayPal. Stripe could make a particularly apt partner given its board member, Sequoia partner Michael Moritz, is chair of Klarna. But even here, the potential bidders may find it easier to strike a joint venture rather than a pricey deal. An Afterpay-style trip down the aisle is not Klarna’s guaranteed outcome.

 

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