Humm deal a turning point for buy now, pay later
After being valued at crazy multiples of revenue for years, the buy now, pay later sector is coming back to earth. Latitude's takeover of Humm's business shines a light on the new paradigm.
When the country's only two profitable buy now, pay later firms see the compelling commercial logic in consolidation it leaves a big question mark hanging over the remaining 10 listed players.
Latitude Group's proposal to buy the BNPL business of Humm Group for $335 million in shares and cash appears to put an end to BNPL businesses being valued at sometimes crazy revenue multiples.
Ahmed Fahour, chief executive of Latitude, is paying $335 million for a BNPL business that should generate $100 million pre-tax within two years. This is predicated on achieving cost synergies of $70 million, two-thirds of which come from rationalising technology platforms.
Latitude Group's Ahmed Fahour says he much prefers traditional corporate valuation criteria. David Rowe
In other words, Latitude is applying traditional corporate valuation techniques to the transaction rather than the 40 to 50 times revenue multiples used to value BNPL companies that lose money.
When Square's purchase of the loss-making BNPL provider Afterpay was announced in August last year it was at 42 times 2021 revenue. There has been a sea change in valuations since then with Afterpay's shares now trading at 25 times 2021 revenue.
In essence, shareholders in Afterpay who did not sell out for cash when the stock was trading at $130 and, instead, rolled their shares into Square are now facing losses of about 45 per cent.
This is in line with the losses suffered over the past few months by owners of leading BNPL players around the world including Affirm, which is down 52 per cent from its record high in November.
Five advantages for Latitude
Fahour sees five advantages flowing to Latitude from going ahead with the Humm deal.
First, it gains scale through the addition of Humm's 2.8 million BNPL customers as well as $1.8 billion in receivables and relationships with 70,000 merchants.
Latitude already has about 500,000 BNPL customers and 2.2 million customers using its interest-free, instalment product offered through retailers such as Harvey Norman, the Good Guys and JB Hi-Fi.
Its total customer base will now exceed 5 million, which is up there with the major banks despite not having mortgages or deposit accounts.
The second advantage is the increase in Latitude's share count through the issue of 150 million shares worth $300 million to Humm's shareholders.
Latitude's shares have drifted from $2.50 to $2 since a compliance listing on the ASX in April last year despite a forward dividend yield of 8 per cent. Fahour attributes much of the poor share price performance to the lack of liquidity in the stock.
About 65 per cent of the issued capital has been locked up with the vendors KKR, Deutsche Bank and Varde. Half their stake comes out of escrow at the end of February.
"This [the Humm transaction] should help us get indexed," Fahour says.
"This is actually a really big opportunity on the back of the $100 million earnings uplift to place those shares into some institutional hands and that will mean there'll be liquidity in the stock," he says.
Fahour says Latitude could have about 37 per cent liquidity by the time it joins the S&P ASX300 index in the second half of this calendar year. When Humm was removed from the index its shares fell 10 per cent.
A third advantage of buying Humm's consumer finance business is that it fills a gap in Latitude's product offering.
First M&A deal of the year
When Fahour joined the company two years ago he had an objective of moving into big-ticket BNPL, but never got there. In buying Humm's consumer finance business he is getting the largest big-ticket BNPL operation in Australia.
Humm offers BNPL for amounts up to $30,000. Customers have been using this to buy solar panels, batteries and to finance home renovations.
A fourth advantage is that Latitude can provide the capital to fund BNPL expansion into offshore markets. Humm had existing plans to expand in Canada, the United Kingdom, Ireland and Singapore, but would have struggled to fund that.
Finally, the deal presents an opportunity to update Latitude's technology platforms.
Fahour plans to roll Latitude's BNPL business onto Humm's BNPL platform, which was developed as part of the merger of two legacy platforms, OxiPay and Certegy EziPay. Also, he will roll Humm's cards business on to Latitude's platform.
Humm Group shares rose about 2 per cent on Thursday after the Latitude announcement, which suggests the remaining Humm commercial lending businesses are only being valued at $100 million despite earning about $20 million to $25 million in net profit.
That does not make sense. It could be explained by the fact the deal is being done when analysts and investors are on leave. If you value the remaining commercial lending business at 10 times earnings it is worth about 45¢ a share.
Given the Latitude deal values the consumer finance business at 68¢ a share, the sum of the parts is about $1.13 or a 50 per cent premium to where the stock traded before Humm said it was open to offers.
The first M&A deal of the year involves a mixture of offensive and defensive plays.
Latitude is getting on the front foot by bulking up ahead of expanding offshore while recognising that parts of the business it is acquiring could cannibalise its existing "interest-free" lending business.
Humm recognises it does not have the capital or the size to mix it with international BNPL players and is therefore better off out of the business. But it is letting shareholders keep a toehold in the big ticket BNPL niche by accepting shares in Latitude.
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Tony Boyd is the Chanticleer columnist. He has more than 35 years' experience as a finance journalist. Connect with Tony on Twitter. Email Tony at tony.boyd@afr.com
Ahmed Fahour
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