Jack Dorsey stands by Afterpay deal despite BNPL bloodbath

US tech billionaire Jack Dorsey is standing by his company Block’s $39 billion purchase of Australian buy now pay later provider Afterpay, despite a plunge in valuations across the sector caused by growing concerns over surging interest rates and tighter regulation.

Almost a year to the day since his company agreed to acquire Afterpay in what was the largest corporate takeover in Australian history, Dorsey said integrating the platform would help propel Block’s push into e-commerce, which he sees as a major growth opportunity.

As Block tries to turn its consumer-facing “Cash App” into a financial “super app,” Dorsey said Afterpay had a key role to play in driving customers towards Block’s merchant clients.

“This really gets at the heart of exactly why we made the acquisition of Afterpay in the first place – because we believe that Cash App ultimately can drive a tonne of discovery for merchants all around the world,” said Dorsey who is also known as the co-founder of Twitter.

Jack Dorsey says the key reason for buying Afterpay was to connect customers with merchants.Credit:Getty

Block closed its acquisition of Afterpay in January, having struck a deal to buy the business in August last year. It paid for the acquisition in shares and Block now has a dual listing on the ASX, with some local Afterpay shareholders rolling over their exposure into the larger US company.

But since the deal was struck, tech stocks have been smashed and valuations in the BNPL sector have also plummeted amid fears of rising bad debts, stiff competition, and tighter regulation.

Sweden’s Klarna, which is backed by the Commonwealth Bank, last month said its valuation had been slashed by 85 per cent, while shares in Afterpay rival Zip are down 70 per cent so far this year.

In a quarterly earnings call with investors, Dorsey emphasised how Afterpay could boost Block’s push into e-commerce by connecting users of the Cash App to merchants from around the world.

Dorsey said Block’s longer-term strategy was focused on linking the Cash App with its payment business, Square. He argued having these two “ecosystems” was Block’s “super power,” and that Afterpay had a critical role in bringing together these two parts of the company.

In the earnings call, Block said Afterpay’s loan losses had improved slightly, though competition was intense, and it remained closely focused on managing the risk of bad debts in a weakening economy.

Block shares were down 5.5 per cent to $119.10 on the ASX after the company’s total transactions were weaker than expected.

Dorsey’s planned creation of a financial “super app” – a term sometimes used to describe China’s WeChat Pay – is designed to allow it to offer customers multiple products through a single offering.

“It really has to do with how much utility we’re offering, so we’re not just focused on one thing such as peer to peer transaction, or investing, or bitcoin, or lending, but it is a place, one place you can do all those things,” Dorsey said.

“We see peers in other industries in other spaces, and other countries that have done that very well, which are sometimes referenced as super-apps or neo-banks. We believe that over the long term, that is the right strategy,” Dorsey said.

While Block’s initial takeover of Afterpay was worth $US29 billion ($39 billion) when launched a year ago, the value of the deal had fallen by the time it was finalised, due to falls in share prices.

Block’s accounts show the company paid US$13.8 billion in shares for Afterpay when the deal closed in January this year, and $US11.6 billion of what it acquired is classified as goodwill.

The company’s chief financial officer Amrita Ahuja responded to a question about Block’s ongoing accounting of the goodwill in Afterpay by saying the company assessed value periodically.

Block reported a net loss of $US208 million for the June quarter, while the company’s measure of adjusted earnings before interest, tax, depreciation, and amortisation were $US187 million. It said Afterpay contributed $US208 million in revenue.

RBC Capital Markets analyst Daniel Perlin said Block’s revenue trends were encouraging, but he highlighted a slowdown in the growth in Block’s gross payment volumes.

Meanwhile, a report from Fitch Ratings on Friday predicted growing challenges for the BNPL sector, pointing to rising unemployment in the United States and the waning effect of COVID-19 stimulus payments from the government.

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