CBA faces $1 billion writedown on Klarna stake

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Commonwealth Bank of Australia is facing a big writedown on the value of its investment in struggling global buy now pay later firm, Klarna Bank AB.

Klarna, which suffered a blowout in operating losses last year to US$487 million, is preparing to sack ten per cent of its international workforce to reduce costs and stem cash bleed in the business.

CBA holds a 4 per cent stake in Klarna’s unlisted business, which was valued at A$2.48 billion (US$1.7 billion) in CBA’s half year accounts released in February.

However, Klarna is desperate to raise fresh capital and, given the bearish sentiment of institutional investors towards loss-making fintechs, it will be forced to issue scrip at a heavy discount to the pricing of recent capital raisings

According to reports in the Wall Street Journal and Bloomberg on Monday, Klarna plans to issue US$1 billion of new scrip at a 33 per cent discount to the price that investors paid for shares last June.

Following its last capital raising the unlisted Klarna business had a market value of US$45 billion.

That valuation is likely to fall by a third once the latest capital raising is completed, investment banking sources told the Wall Street Journal.

Klarna will have to wear the deep discount partly because one of its cornerstone investors, Japan’s SoftBank Group, has racked up multi-billion dollar losses as a result of the collapse in the market value of fintech stocks.

The expected slide in Klarna’s value is likely to have implications for CBA’s bottom line performance for the 12 months to the end June 2022.
It is likely the bank will be forced to write down the carrying value of its investment by at least A$800 million.

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CBA recently changed its method for valuing its interest in the unlisted Klarna business. 

It applies an average price-to-revenue multiple derived from other listed buy now pay later providers such as Affirm Holdings and Zip.

Since the start of January Affirm’s Nasdaq-listed scrip has collapsed by more than 75 per cent. 

Affirm is now trading on a price-to-revenue multiple of less than eight times, which implies that CBA might be required to write down the Klarna investment by more than A$800 million.

That’s because CBA’s assessment of the investment at the end of December 2021 was based on an assumption that listed businesses in Klarna’s cohort were fetching average multiples of 28 times revenue.

“The valuation of the investment as at 31 December 2021 was based on a methodology leveraging revenue multiples of market listed comparable companies,” CBA revealed in note 6 to the 2022 interim accounts. 

“Comparable listed companies were included based on industry, size, developmental stage and/or strategy.

“The Group adopted a revenue multiple of 28x in its valuation as at 31 December 2021.”

If CBA continues to use this method of valuing its Klarna investment, the bank could be forced to take a write-down of more than A$1 billion given that most BNPL stocks at Klarna’s stage of development are now trading on multiples well below 10 times revenue. 

The bank might be able to avoid such a large write-down by changing the accounting treatment of the investment – a move that would invite intense scrutiny from analysts and investors.

CBA is also facing potential write-downs on other fintech investments, most notably the US-based Gemini cryptocurrency exchange, which could come under commercial pressure as trading conditions in the crypto market turn chaotic.

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Source: | George Lekakis

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