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Afterpay takeover sealed as Block lands on the ASX
Block (ASX:SQ2), the purchaser of Afterpay, has finally landed on the ASX. The shares (actually CHESS depositary instruments, or CDIs) started trading last Friday on a deferred settlement basis. This is the endgame of the process that began last August, when Block (then named Square, Inc.) and Afterpay announced the agreed takeover of Afterpay by the US company.
The new SQ2 CDIs on the ASX represent shares of Square Class A common stock at a ratio of one for one. This means that the Aussie CDIs are worth as much as the NYSE-listed Block shares, adjusted for currency exchange differences. Afterpay (ASX:APT) shares will no longer show up on the ASX, and those that do hold shares will see Block (ASX:SQ2).
How did SQ2 perform on ASX debut?
When trade began last week at 11am, Block’s share price in New York closed at US$128.14. This equates to $177.50 at current exchange rates. SQ2 CDIs moved to $177.87 in just ten minutes of trade, but soon dropped to $175.87.
This means there is the potential for an arbitrage opportunity, where the Aussie-listed shares may trade at a discount to their US equivalents after taking into account foreign exchange risk. At the moment the ASX-listed shares are trading at a slight discount.
Is it worth buying?
Afterpay is the global leader and has first-mover advantage in the buy-now, pay-later (BNPL) space. In August 2021, Block (Square) acquired the company for US$27.7 billion ($39 billion, at the time) via a share swap. The merger between the two created a formidable entity that brings together two businesses that complement each other.
The Square business has two separate operations – merchants can accept and manage payments, borrow money and run day to day operations. The Cash App business allows consumers to transfer, spend and invest their money. The theory is that Afterpay will expand both of Block’s businesses and broaden the connection between Square and the Cash App.
US research firm BTIG sees Block as a buying opportunity, with a Buy rating and a US$320 price target. Converted to the ASX-listed SQ2, that equates to a rough price target of $442 at current exchange rates. That’s a whopping 135% upside if borne out.
