Square to Buy Afterpay So It Doesn't Pay Later

In a surprising turn of events, no-moat Afterpay AFTPY has agreed to be acquired by narrow-moat Square SQ by way of a scheme of arrangement. Afterpay shareholders will receive 0.375 share of Square’s Class A common stock per 1 Afterpay share. This implies a purchase price of AUD 126.21 based on Square’s latest closing price of USD 247.26, or AUD 39 billion equity valuation for Afterpay. The transaction is due to close in the first quarter of 2022 and is subject to shareholder and regulatory approval. Square may pay 1% of the total consideration in cash.

We lift our fair value estimate for Afterpay to AUD 113 per share. We ascribe a 75% probability weighting on the acquisition proceeding to completion at Square’s current implied offer price of AUD 126 per share and a 25% probability weighting that the deal will fall through, resulting in Afterpay reverting to our unchanged, stand-alone valuation of AUD 75 per share.

We believe the transaction has a high chance of succeeding. First, the implied offer is 68% above our valuation for Afterpay on a stand-alone basis--a generous premium, in our view. Second, Afterpay’s board--which includes its founders, who collectively own about 14% of the firm--is unanimously in favour of the transaction. Third, the deal enhances both Square’s and Afterpay’s product suite and in particular accelerates Afterpay’s growth as it now benefits from Square’s financial backing. In the meantime, however, Afterpay shareholders have the luxury to sit tight, as we further digest the implications of the offer and the combined entity’s prospects.

The proposed transaction bolsters Afterpay’s offering and helps entrench the stickiness of its user base. After the transaction, Afterpay customers can access Square’s Cash App functions, such as peer-to-peer payments or stock trading, and buy from a larger pool of merchants. Afterpay merchants can also sell to more than 70 million Cash App customers--more than 4 times Afterpay’s.

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