As Commonwealth Bank prepares to write down its investment in loss-making global buy now pay later platform, Klarna, the bank is almost certain to come under pressure to explain the terms under which it holds “a 50 per cent economic interest” in the Australian and New Zealand operations of the troubled BNPL provider.
Klarna is CBA’s largest fintech investment outside of its proprietary digital businesses and there is no way its management can sugar-coat the material erosion in the last six months of its strategic interest in the global business.
According to an AFR report on 31 May, CBA’s chief executive Matt Comyn remains a believer in Klarna’s business model and its prospects.
But after electing not to participate in Klarna’s most recent capital raising, CBA’s interest in the Swedish-based business has fallen from 5.5 per cent to under 5 per cent of the firm’s issued capital.
That holding is currently valued by the bank at A$2.48 billion (US$1.7 billion).
However, the global sell-off of BNPL stocks in the last six months has wiped between 60 per cent to 85 per cent from their market valuations.
Standalone BNPL providers such as Nasdaq-listed Affirm Inc have shed more than 80 per cent of their value, while providers that are more diversified such as PayPal are down 60 per cent.
Because Klarna stock is not publicly listed, CBA uses a special accounting method to value its stake in the company.
It determines the carrying value of its stake according to average movements in the price to revenue multiples of a basket of BNPL companies that includes Affirm and PayPal.
Since the start of January the revenue multiples for Klarna’s listed reference stocks have collapsed from around 30 times to less than 10.
CBA applied a revenue multiple of 28 times revenue to set the fair value at $2.48 billion on 31 December last year.
Unless the bank makes a controversial decision to amend the accounting method to avoid a mark down, CBA shareholders are facing a writedown of between A$1.5 billion and A$2 billion at the bank’s full year profit announcement in August.
That would bring the valuation down to almost the price CBA originally paid for the stake.
CBA joined the Klarna register in the middle of 2019 with a US$100 million investment and boosted that to US$300 million the following year. That investment translated into an outlay of around $430 million in Australian dollars.
While the looming writedown will not appear as a cash item in CBA’s 2022 financial accounts, it is set to have an impact on the bank’s capital position.
That’s because Comyn confirmed to Australian stockbroking analysts in February that a widely anticipated public float of Klarna’s global business would have resulted in a capital release for the bank rather than a cash earnings gain if the bank had sold into any introductory public offer.
Presumably, the same logic would guide the accounting treatment of any writedown.
The looming writedown of the investment in the global Klarna business will likely prompt CBA shareholders to seek more clarity from Comyn about the nature of CBA’s involvement in the Swedish company’s Australian and New Zealand operations.
When Klarna launched its BNPL business in Australia on 30 January 2020, the CBA stated in a press release that it would be a funder of Klarna’s Australian and NZ operations.
The release also stated that CBA had 50 per cent “ownership rights” to the local businesses.
“CBA and Klarna will jointly fund and have 50:50 ownership rights to Klarna’s Australian and New Zealand business,” the bank stated in the 2020 release.
CBA’s claim to half ownership of Klarna’s local businesses has been reasserted by CBA since then, including after it flagged the launch in March 2021 of its proprietary BNPL service, StepPay.
“Our partnership with Klarna remains a key part of our buy now pay later strategy,” Comyn said in August last year.
“We have a five per cent equity stake in Klarna and a fifty per cent economic interest in the Australian and New Zealand businesses.”
Neither Comyn nor CBA have revealed any details as to how the bank holds “ownership rights” over a “fifty per cent economic interest” in the Australian and New Zealand arms of Klarna.
Disclosures made by Klarna’s Australian holding company to the Australian Securities and Investments Commission also make no reference to CBA’s ownership interest at any time in the last three years.
According to ASIC records downloaded last week, “Klarna Bank AB” is the sole shareholder of the local trading entities known as Klarna Australia Pty Ltd and Klarna NZ Pty Ltd.
Other documents filed with ASIC confirm that the Australian registered Klarna companies are “foreign-controlled”, with no suggestion supporting CBA’s claim to a fifty per cent economic interest in the businesses.
The ASIC records cast doubt on the status of CBA’s ownership claims over Klarna’s local arms.
It might be that CBA’s claim originates from a special legal agreement it has entered with the Swedish company.
If that is case then why hasn’t the bank clarified the nature of its ownership rights to its shareholders?
Given the bleak trading environment for BNPL providers such as Klarna a more urgent question is what obligations are attached to those alleged “ownership rights”?