Square Inc announced on Monday that it has agreed to buy BNPL pioneer Afterpay Ltd to form a global online payments behemoth, paying a 30% premium in a share-swap deal that is expected to be Australia's largest-ever buyout.

Afterpay, which was founded in 2014, has been the forerunner of the niche no-credit-checks online payments sector, which exploded into the mainstream last year as more people, particularly young people, chose to pay for everyday items in installments during the pandemic.

The sector's rapid growth has reportedly prompted Apple Inc to plan such a service due to its burgeoning popularity, rapid uptake among users, and lax regulation.

"Square and Afterpay share a common goal... By working together, we can better connect our Cash App and Seller ecosystems to provide even more compelling products and services for merchants and consumers," said Jack Dorsey, co-founder of Square and Twitter Inc.

Afterpay gains a large customer base in its main target market, the United States, where sales nearly tripled in constant currency terms to A$11.10 billion ($8.15 billion) in fiscal 2021.

In the absence of a better offer, the deal "looks close to a done deal," according to Ord Minnett analyst Phillip Chippindale. "In our opinion, the strategic rationale for the business combination is sound (it brings significant scale advantages to Square's Seller and Cash app products, among other things)."

According to the companies, Afterpay shareholders will receive 0.375 shares of Square class A stock for each share they own, implying a price of around A$126.21 per share based on Square's Friday close.

On Monday, Afterpay shares were up 26% to A$121.55, but still below the implied value of the offer.

BNPL companies lend customers small amounts of money, usually up to a few thousand dollars, that they can pay back in interest-free installments.

They avoid the legal definition of credit - and credit laws - because they make most of their money from merchant commissions and late fees rather than interest payments.

BNPL providers, unlike credit card companies, are not required to run background checks on new accounts, and typically only ask for an applicant's name, address, and birth date. Critics argue that this makes the system more vulnerable to fraud.

The offer, which comes at a time of frantic deal-making, is more than 30 percent higher than Afterpay's last close, and Afterpay's shareholders will own roughly 18.5 percent of the combined company.

According to the joint statement, Afterpay's board of directors unanimously recommended the deal to its shareholders.

Anthony Eisen and Nick Molnar, co-founders of Afterpay, will join Square, which will appoint one Afterpay director to its board of directors following the deal.

Afterpay shareholders will be able to trade shares via CHESS depositary interests through a secondary listing on the Australian Securities Exchange, according to the company (CDIs).

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