Home / Opinion / Is the Afterpay takeover a good deal for shareholders?

Afterpay (ASX:APT) – It’s the end of an era for the popular buy-now, pay-later (BNPL) platform that took the world by storm and kicked off a tech sensation. This week, Afterpay agreed to a $39 billion all-stock takeover by US payment giant Square Inc. (NYSE: SQ), bringing together two of the most advanced global fintechs in a merger that will go down as the largest M&A deal in Aussie history.

So, who is Square?

Square is a US$168.5 billion ($228 billion) payments giant focused on businesses that are taking mostly in-person transactions. If we compare that with PayPal (NASDAQ: PYPL), the difference is that PayPal is geared more toward online transactions.

Square, launched by Jack Dorsey (co-founder of Twitter) and Jim McKelvey, has done a remarkable job, posting second-quarter revenue of US$4.68 billion, up 144% from the year before. Square has been successful in growing its user base by offering ease of installation and flat-rate pricing. And this week, Square made a move on Afterpay. While not going into too much detail, here are the main points:

• Afterpay shareholders receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay share they hold. Square may also elect to pay 1% of total consideration in cash.
• Based on the latest Square share price of US$247.26, this implies a transaction price of approximately $126.21 per Afterpay share, and values the deal at approximately US$29 billion ($39 billion).
• The deal is at a 30.6% premium to the pre-bid price and 10.5% premium to the average price over the last 30 days.
• Square will establish a secondary listing on the ASX to allow Afterpay shareholders to trade Square shares via CHESS Depositary Interests (CDIs). Afterpay shareholders will be able to choose whether to receive the consideration in NYSE listed Square Class A common stock or CDIs.

Is it a good deal?

According to the Australian Financial Review, the merger and acquisition deal is the largest in Australian history, but the deal hasn’t received the green light just yet. The deal is conditional on the Australian Taxation Office (ATO) ruling in favour of a “share-for-share capital gains tax rollover relief.”  The deal is also subject to no superior proposal emerging, and an independent expert concluding that the transaction is in the best interests of shareholders.

The deal is attractive because Square and Afterpay have a shared purpose with a long list of synergies. The combined entity ticks many boxes. Broker BNP Paribas says the acquisition “accelerates SQ’s BNPL scale, provides cross-selling opportunities and expands customer and geography footprints.”  Square says it built its business to make the financial system more fair, accessible, and inclusive. Add in Afterpay, which has built a trusted brand aligned with those principles, and the platform becomes a juggernaut. Together, the combined entity can better connect Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.

But the deal is tilted in Square’s favour. The buy price of $126 is far below APT’s 2021 high-point, at $160, on February 10. A Square shareholder is getting a better deal. For Square, the acquisition of Afterpay presents it with an attractive opportunity towards BNPL platforms, away from credit cards. Combining Square and Afterpay’s complementary businesses presents an opportunity to drive growth across multiple strategic levers, including:

• Grow both the Afterpay and Space customer base. The announcement says “Afterpay’s global merchant base will accelerate Square’s growth with larger sellers and expansion into new geographies, while helping to drive further acquisition of new Square sellers. Afterpay will expand Cash App’s growing product offering, enable customers to manage their repayments, and help customers discover new merchants when the Afterpay App is integrated into Cash App.”

• Bring added value, differentiation, and scale to Afterpay. Afterpay will benefit from Square’s large and growing customer base of more than 70 million annual transacting active Cash App customers and millions of sellers, which will expand Afterpay’s reach and growth both online and in-person.

“Square has 70 million customers, compared to Afterpay’s 16 million. Square will use Afterpay to boost its merchant and retailing system, and its Cash App. Afterpay will be integrated into Square’s merchant platform and it will also become part of the Square Cash App, allowing Square to better compete with the likes of PayPal, Affirm and Klarna in the United States,” according to the ASX announcement.

Is this a good deal for Square shareholders?

It sure is. The BNPL later acquisition will help underpin the shift in consumer preferences away from traditional credit and towards BNPL. Both businesses fit neatly together and share many synergies that will promote growth in the combined business. Both businesses are expected to be improved by combining the two ecosystems. But does that mean a good deal for shareholders?

Off the cuff, the deal is a good one for shareholders and platforms. Square will have the largest and most successful BNPL service, suitable for the millennial crowd. This fits neatly with its US payment service. From the deal, Afterpay will increase its gross profit growth. Shareholders that choose to receive shares will receive them either on the ASX CDIs or US-traded stock. Square does, however, trade on a trailing 12-month PE of 198 times earnings, so it’s not cheap by any means. But the deal is tilted in Square’s favour. Square has bought Afterpay at a bargain.  

Broker reports

• Square has 49 analysts covering the company. There are 10 strong buy ratings, 22 Buy ratings, 14 Hold ratings and 3 Sell ratings on the stock.
• A BMO Capital Markets report says: “Analysts seem to generally like the deal, with many raising their 12-month price targets. The average now sits at $290, up from $277.65 last month. The street (as in, analyts’ consensus) high sits at $380, while the lowest sits at $175 from BNP Paribas.”
• BMO raised its target price to $259 from $225, reiterating its Market Perform rating.

BMO Capital Markets says the acquisition, “accelerates cross-selling opportunities and expands customer and geography footprints.” The firm believes the deal will lift EPS after one year as the merged entity starts to grow and expand its footprint. Although the timing is a bit off, Australian broker Morgans agrees that the combination “makes strategic sense as both companies can leverage each other’s client base.”

The next move will be to put pressure on PayPal, giving Square a real competitive edge to take out top spot in the global online payments marketplace.