Humm Group Ltd’s [ASX:HUM] share price is up over 20% as the buy now, pay later (BNPL) stock flags potential takeover bids.
Source: TradingView.com
Humm rises while BNPL sector falls
On Monday, BNPL firm Humm (formerly FlexiGroup) sent out a short dispatch whose brevity belied the great import of the message.
Humm was open to offers.
Down 35% year-to-date prior to the announcement, HUM jolted the market by revealing it received ‘approaches from third parties to acquire all or part of Humm’.
But HUM’s condensed update didn’t end there.
Long-time Humm chair, Andrew Abercrombie, was stepping down.
Were the two events linked?
Yes, as The Australian’s Bridget Carter reported overnight.
Abercrombie’s departure was no coincidence.
The former chair himself put a buyout proposal before the firm, backed by a private equity firm.
According to The Australian:
‘DataRoom understands that Mr Abercrombie, a Liberal Party powerbroker, has been in talks around the market over the past two months, making efforts to find a buyer of the business.
‘There are suggestions that the buyout fund and Mr Abercrombie have put forward a proposal worth about $1 per share.
‘Some sources have suggested that there are questions surrounding whether the firm involved is able to fund a proposal.
‘Sources have suggested that Humm would be keen to embark on a deal as it stares down the prospect of an equity raising next year, with BNPL providers facing the prospect of losses and the need to boost their cash reserves.’
Humm thinks itself undervalued
While the cramped ASX BNPL sector is in the red this year, Humm weathered the sell-off better than others.
Openpay Group Ltd [ASX:OPY], for instance, is down 65% year-to-date. Splitit Ltd [ASX:SPT] is down 80%. Laybuy Holdings Ltd [ASX:LBY] is down 82%.
And Afterpay Ltd [ASX:APT] — earlier shielded from souring BNPL sentiment by its close association to Square’s share price following an all-scrip takeover — is now sliding along with its soon-to-be acquirer.
APT is down almost 30% in a month, while Square (renamed Block) is down 25%.
Humm’s openness to private equity proposals indicates an erosion of trust in public markets to realise Humm’s self-assessed value.
Yesterday, Humm said the business has ‘significant potential, both in Australia and overseas’.
According to HUM’s board, the company’s shares are ‘undervalued by recent trading prices on the ASX and the Board is keen to maximise value for all shareholders’ .
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2022: a make-or-break year for BNPL stocks?
Humm fielding offers follows Square’s blockbuster acquisition of Afterpay.
Afterpay’s deal prompted some analysts to predict a merger and buyout frenzy. But there’s been no takeover of another BNPL stock since.
Yet, acquisitions and mergers are now a much realer prospect.
For instance, last week, The Australian reported that Zip Co Ltd [ASX:Z1P] and Sezzle Inc [ASX:SZL] considered merging before disagreement over price scuppered talks.
2022 may be a make-or-break year for smaller BNPL firms.
Competition is only set to rise. Traditional banks like the Commonwealth Bank of Australia [ASX:CBA] and Suncorp Group Ltd [ASX:SUN] launched their own BNPL offerings and PayPal is gathering momentum with its instalment product.
It’s likely that interest rate hikes will also make debt tougher to finance.
Most BNPL stocks are not self-sustaining, relying on equity capital or debt to fund growth and receivables.
But depressed valuations and rising interest rates will make funding harder to come by, straining already thin margins.
Some BNPL stocks may be looking to sell to bigger players with copious cash reserves or easy access to funds.
But who are these big players and would they be interested in smaller firms like Humm, Openpay, or Laybuy?
If you’re a big fintech or bank, is it easier to rollout your own BNPL than acquire one?
Other BNPL firms may seek to merge with peers instead, hoping that by joining forces they can reach a critical mass of customers and merchants.
But would merging guarantee success?
One of the largest BNPL businesses in the world, Afterpay, is yet to turn a profit despite having 16.2 million active customers and nearly 100,000 merchants.
What’s the magic number for active users that will tip a BNPL into profitability? 20 million? 30 million? 40 million?
2022 will be a big year for BNPL for at least two other reasons too.
ASX BNPL stocks may face the possibility of merchants passing on BNPL commission fees to consumers via surcharges.
The Reserve Bank of Australia’s October 2021 Review of Retail Payments Regulation found that:
‘Taking these factors into account, the Board has concluded that it would be in the public interest and consistent with its mandate to promote competition and efficiency in the Australian payments system for BNPL providers to remove their no-surcharge rules, so that merchants have the ability to apply a surcharge to those payments if they wish. This approach is consistent with the Board’s longstanding principle in relation to no-surcharge rules.’
Finally, BNPL stocks also face regulatory scrutiny from the most lucrative market — the US.
The Wall Street Journal recently reported that America’s Consumer Financial Protection Bureau is probing BNPL companies including Afterpay, Affirm, and Klarna.
The agency is examining BNPL’s role in increasing consumers’ debt and how the companies use customer data.
All in all, I believe 2022 will be a big year for the sector as it reckons with the promise — and cost — of its growth.
If you’re interested in fintechs and want to find out more, I suggest reading through our latest fintech report for 2022.
It profiles three promising fintechs. Coincidentally, one of them is the only profitable BNPL stock in Australia.
Regards,
Kiryll Prakapenka,
For Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here
