ThinkSmart retains a 10% (includes an employee ESOP of up to 35%) stake in ClearPay with an option for AfterPay to acquire the stake anytime after 23 August 2023 with a put option available to ThinkSmart six months later.
The valuation of ClearPay is based on agreed principles based on market valuations at the time of transaction.
A press release on the 23/6/2020 confirmed that trading had been positive with over one million active customers now in the UK. This growth was faster than the entry into the US market.
The Afterpay share price has continued a rapid incline subsequent to Tencent acquiring a 5% stake in the business.
Two key questions:
- Will the option be exercised prior to 2023?
- What value can be assigned to the ClearPay business?
Likelihood of early exercising of the option
One would suspect that this would only occur if it was in the best interest of Afterpay. The exact terms of the option and agreement are not public however one would suspect that an early exercising of the option by Afterpay may be possible if highly favourable for Afterpay - such as continued high growth in the EU market. Given the (lack of) other substantial operating activities by Thinksmart, an early exercising of the option may likely be accepted by management.
However it should also be noted that there is still substantial execution risk in ClearPay and the entire BNPL (buy now pay later) sector. Klarna, the legacy competitor, with customers including Asos, is continuing to grow and LayBuy (with an ASX listing upcoming) may prove to be a further threat, recently signing with FootAsylum. Internationally several BNPL providers are also forming close partnerships with credit card providers, suggesting that further well-financed competition and innovation, is likely in the sector.
Value of ClearPay business
The December 2019 accounts pen the ClearPay option as valued at £16m. The notes also assign some more information on how this value is determined:
Under either the call or put option, the sale of the Clearpay shares to Afterpay will be at a price calculated on agreed valuation principles. The Group engaged a third party global professional services firm to value its retained shareholding in Clearpay at 31 December 2019 for accounting purposes under AASB 9 in accordance with AASB 13 (Fair Value Measurement). This valuation has been undertaken based on publicly available information, reflecting the above and including a discount for the lack of marketability of Clearpay as a privately owned company, and has produced a range of values for the Group’s 10% shareholding in Clearpay. As the Group has limited control over the setting of the price that it will receive for the transfer of the ESOP shares to the Clearpay employees, the Group has further discounted the valuation by 35% and then taken 10% below the mid-point of the discounted valuation range to determine the accounting fair value of its retained shareholding in Clearpay to be £16.453m at 31 December 2019.
Simon Thompson from IC confirmed that the Afterpay share price is one of the measures used in determining the valuation of the Clearpay shareholding. We know that this has almost doubled from AUD$30.11 on 31 December 2019 to AUD$57.00 today.
We also note that this value is discounted (i.e. for every period closer to exercise date, the value will increase) and a haircut has already been taken to consider ESOP and range.
A bit of a sense-check could be done by looking at how much of the valuation of Afterpay could be assigned to Clearpay alone. From an Afterpay perspective, the US market appears the most attractive given the low penetration to date and fast growth. Clearpay growth appears inline with US growth to date, however we note the smaller market size and the more lower credit card interchange fees in Europe, potentially resulting in lower BNPL revenues and margin. In addition, Clearpay appears focussed on the UK market at present which is smaller than the US market.
For instance, very crudely, the Afterpay market cap of AUD$15B is over 8.4 million customers (growing 100% p.a). Therefore assuming nominal value of c. AUD$1800 per customer, the Clearpay business could hypothetically be worth £800m. Obviously being a component of the global Afterpay group is key to this valuation given the group synergies but assuming a 50% haircut, would still drive a valuation of £400m, giving the Clearpay stake held by Thinksmart a value of £40m.
However I suspect that once the 2020 interim results are released, it will be easier to identify and reverse-engineer how impactful the Afterpay share price has been to the increase in carrying value of the Clearpay holding.
What else is in the business?
Aside from the Clearpay stake, there is approximately £8.5m of cash (as at December 2019) and c.£4m of other net assets, largely finance lease receivables arising from operations of other financing businesses (predominantly lease originations). The business was cashflow positive from operations in 2019. In addition there is an ongoing legal claim with Carphone Warehouse, for a headline value of £20m of damages.
What valuation is reasonable?
From discussion above, it does not appear unreasonable for the Clearpay stake to be value at £32m (double the December 2019 valuation). This assumes the Afterpay share price remains strong, which appears supportable given favourable COVID-19 trading updates, new shareholders and acceptance into various ASX indices.
Cash of £8.5m (NB: operations cashflow positive)
- Other net assets of £4m
- Clearpay holding of ~£32m (not unreasonable)
- Implied value £44.5m
The current market cap of c. £21m provides some opportunity, however keep in mind that the put option may not be exercised until 2023 and execution is not risk free. And the valuation of Afterpay can be a little challenging to understand.