Given the performance and valuation discrepancy between FXL and other BNPL players recently, I thought the likelihood of any potential corporate activity is not negligible. Although investment decision should be made based on the standalone merit of the business, the potential for corporate activity would further enhance it and hopefully also provides a floor in bear case scenario.
After digesting FXL's history and product portfolio (I'm a new shareholder of FXL), below is my thoughts on the potential types of acquirers / strategic investors. In each case, I will outline the key rationale along with some recent examples found during my research (if any):
1. Commercial banks / credit card companies
It is pretty obvious why banks / credit card companies would like to jump on the wagon to hedge against the structural migration trend as BNPL companies are cannberlising their once bullet-proof revenue. One significant cost synergy is large bank or credit card companies could use their own balance sheet to reduce the cost of debt facility significantly. In addition, they could also help accelerate distribution and uptake at the merchant end for BNPL products.
Recent examples include CBA / Klarna and Westpac / Z1P. So there are two obvious elephants in the room (NAB / ANZ) who might be potentially interested. NAB back in 2015 is actually understood to have been approached FXL for some potential corporate activity according to The Australian so I assume their interest hasn't waned once the Covid dust settles. I do think a strategic investment (invest-to-partner) approach is far more likely than full-blown takeover in this category. Here is the link on Westpac's rationale in investing / partnering with Z1P:
Quite a few private equity funds have recently shown strong interest in this space. They normally have investment horizon from 3 - 5 years and very much growth-focused. So in theory would allow BNPL companies to not be distracted by quarterly update and better align its strategy to enable long term value creation. Part of the selloff for FXL is it has recently dropped dividends which might have caused those dividend-reliance investors to exit the register.
Recent example include Heights Capital / Z1P, KKR and consortium / Latitude Pay. FXL can be a textbook example for asset stripping, i.e. the sum of parts value is significantly discounted to individual assets combined. KKR who owns Pepper and Affinity Capital who owns Scottish Pacific could be potential suitors as they can do 1) or / and 2). 1) Only buy the commercial lending division of FXL to roll into their portfolio companies, 2) take out the pure-play BNPL company Humm and combined with Latitude Pay (makes more sense to KKR). I think a strategic stake / full-blown takeover is equally likely although in FXL's case a full-blown takeover has to be friendly as it needs Andew's nod obviously. According to The Australian, Andrew has previously considered delisting approach through partnership with a private equity fund. I think it only makes more sense to do it now given the depressed share price and valuation gap. Another obvious candidate is Tanarra Capital who is already on the register.
Large tech giants have been one of the few groups that have benefited from the crisis and most of them have seen their share prices reach all-time high. A script-based takeover would be particularly astute as it is almost free lunch to them, i.e. minimal dilution given the steep valuation gap. The best part is any incremental earnings would naturally see a multiple re-rate under the new umbrella not to mention the potential collaboration opportunities on both distribution and product fronts.
Recent example include Tencent / Afterpay and AliPay / Klarna. Strategic investment makes more sense in my view. It is also dangerous that some of the tech giants might actually disrupt pure-play BNPL players, e.g. in China WeChat has an inherent feature in the app that allows payment processing between any consumer and merchants so the whole land grab strategy is exponentially harder if there is an incumbent super App. It is probably not inconceivable to assume WhatsApp and similar apps are also thinking about this space and they have enormous advantage to kickstart a product or simply bolt-on and merge with another BNPL app.
4. Existing leaders in BNPL space
The significant valuation uplift of market leaders also created strategic and financial rationale for industry consolidations.
From strategic perspective, I thought FXL's product portfolio is interesting and can be complementary to some others. Below is the screenshot from Goldman Sachs June report, Humm is more focused on large ticket items and durable nature items while most players are more focused on high-frequency low-value consumable items. So I see the benefit in combining the product portfolio of FXL and another player as the potential cannibalisation from product overlap is low. In addition, Bundll doesn't require merchant takeup so it is not vulnerable to over-saturation from merchant's perspective but the frequency for usage needs to be high to compensate margin (I have commented on this separately through another post). The third angle to consider is geographic dominance, whilest FXL is behind APT / ZIP in overseas market, it is clearly a leader in Australia and possibly has the dominant player in NZ / Ireland (just under 10M population combined so not negligible). It might make sense for a new market entrant like Klarna to properly consider buying FXL's book vs trying to increase their market share organically as the latter requires a lot of efforts, cost and time. FXL's current valuation offers a fairly cost-effective alternative means to access the instant market share.
From pure financial perspective, I think most if not all decent sized BNPL players could afford to pay a significant premium to acquire FXL and be value accretive due to the significant valuation discrepancy. If nothing else, this fact alone would warrant some players to take a closer look at FXL once all the low hanging growth fruits are gone. The irony is their share price will probably explode with the announcement judging from empirical evidence.
Recent example Z1P / QuadPay, AfterPay / ClearPay. I think full-blown takeover makes more sense although the consumer-facing brands are more likely to be retained. The whole backend will be merged and streamlined to take cost out.
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Above is my thoughts and as mentioned at current price the likelihood of corporate activity can not be overlooked for FXL. This would be another potential catalyst to trigger share price re-rate and I foresee a fair amount of industry consolidation ahead given it is still a sunrise industry. Last but not least, I'd like to emphasize the fact that so far FXL is still the only profitable player so far and history has shown it is doing just fine as the consumer / SME finance company pre-BNPL hype. The market has in fact still priced it that way (14x Price to trough earnings of 30M or 7x Price to normal earnings of 60M - 70M) so at this level I think the share price is much more sensitive to positive news than negative news. My personal take is CR washout will result in / has resulted in capitulation already and it will grind up from here.
FXL Price at posting:
$1.13 Sentiment: Buy Disclosure: Held
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