Afterpay to be acquired by Square. Square (NYSE:SQ) and Afterpay (ASX:APT) announced today massive news that Square would acquire 100% of the shares of Afterpay by way of a scheme implementation deed. From humble beginnings at an IPO value of 1$ per share to Afterpay to be acquired by Square, this is massive news.

Afterpay to be Acquired by Square
Some Might Know of Square as the Tiny White Boxes Some Merchants Use in Australia

Afterpay to be Acquired by Square

The deal is to be worth US$29billion or approximately AUD$39 billion according to the announcement and is to be paid in Square Stock. Based on the current Square share price of US$247.26, this implies a price of approximately $126.21 for each Share in Afterpay being acquired.

The share price of Afterpay has had somewhat of a tough year, trading down 19% in 2021, however, the deal is somewhat in the middle of the 52-week range of 65.53 – 160.05. Some investors may be slightly disappointed given the implied value.

Square (SQ:NYSE)believes Afterpay will be accretive to gross profit growth with a modest decrease in Adjusted EBITDA margins expected in the first year after completion of the transaction. Square sees an opportunity to invest behind Afterpay’s strong unit economics as well as attractive growth synergies, including the opportunity to introduce offerings and drive incremental growth for sellers and increased engagement for Cash App customers

The Deal will better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.”

Square CEO Jack Dorsey

Both Anthony Eisen and Nick Molner will join SQ upon the completion of the Deal to lead Afterpay’s respective merchant and consumer businesses. Square will also appoint one Afterpay director as a member of the SQ board following the completion of the deal.

So What Happens to My Afterpay Shares?

Under the terms of the Scheme Implementation Deed, which has been approved by the members of the Boards of Directors of both Square and Afterpay, Afterpay shareholders will receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay ordinary share they hold on the record date (Consideration). Square may elect to pay 1% of the total consideration in cash

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Hence, holders on Afterpay stock on the record date can either elect to receive shares in NYSE listed Square or a Chess Depository Interest which will be listed on the ASX. So, if you would rather keep your money invested in Australia perhaps opt towards the CDI. There may be additional steps required to account for NYSE listed Square Shares.

Afterpay shareholders will receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay share. Following completion of the transaction, Afterpay shareholders are expected to own approximately 18.5% of the combined company on a fully diluted basis.

When Will Afterpay to be Acquired by Sqaure?

The acquisition aims to enable the companies to better deliver compelling financial products and services that expand access to more consumers and drive incremental revenue for merchants of all sizes. The closing of the transaction is expected in the first quarter of the calendar year 2022, subject to the satisfaction of certain closing conditions outlined below

It is anticipated that the Transaction will close in the first quarter of the calendar year 2022. These dates are indicative and subject to change

Afterpay’s (APT:ASX) FY21 Trading Update

The company also delivered their FY21 trading update to the market today. Headline results were:

  • Underlying Sales, up 102% to $21.1billion
  • Group Revenue, up 88% to 925million
  • Gross Profit, up 84% to $675million
  • Exceed its previously stated objective to reach $20 billion in underlying sales 12 months ahead of target.
  • Active customers during FY21 grew to 16.2m, an increase of 63% on pcp
  • Afterpay’s active merchant network now exceeds 100k globally

In our opinion, these are outstanding numbers from APT and it validates the business model that SQ is acquiring. North American growth was exceptional with underlying sales for the FY2021 of $9.8billion or $11.1b on a constant currency basis (up 177% on pcp).

In our opinion whilst the Australian market also continues to grow at nice double-digit multiples (44% growth for underlying sales) you can see that the active customers metric is only up 8% for the prior comparable period. Whilst this is great new’s because it means that the same people are using APT services more, it says to us that we may start to see a slow down in the growth of the ANZ business.

Afterpay and competitors Zip Co. were 2-steps ahead of this and are hence the likely reason for the companies searching for growth abroad in the lucrative US and UK markets, where the Total Addressable Markers and Total Transaction Volumes are significantly higher.

Afterpay (APT:ASX) Share Price in 2021

The Share price of Afterpay is down 19% this year in 2021, however, shares are expected to trade closely to the implied acquisition value of the company at $126 per share once the market opens.

Afterpay prior to the announcement has been one of the worst performers in the Prophet Invest BNPL index, with Sezzle and Zip Co taking out the top spot with a performance of 28% and 18% respectively.

The Worst Performers on the list are likely as expected, the smaller BNPL players, who rode the hype train North only to fall back down. The worst performers in the sector are Laybuy (ASX:LBY) and Splitit Group (ASX:SPT) both falling 50%. OpenPay (ASX:OPY) and Douugh (ASX:DOU) were not too far off at around 40% down for the Calendar Year.

BNPL Sector Consolidation

We first wrote of the sector consolidation back in March 2021, where it appeared that large entrants were looking to participate in the sector. There have since been a number of rumours regarding Goldman-Sachs, Apple and Square looking to enter the market. But companies looking to enter the market have a couple of choices to make, do they Buy, Build or Partner to build their own BNPL services?

In the case of Square, it seemed that Buying an established player in the sector was the easiest and likely the highest odds of success rather than starting from scratch. It will be interesting to see if there is any further sector consolidation in the year.

Globally in our opinion, there are 3 major BNPL players, Afterpay, Z1P Co. and Klarna. However, the top two Klarna and Afterpay make up about 93% of the respective market cap of the listed top 3.

Increasing Number Of BuyNowPayLater Accounts

The number of active buy-now-pay-later accounts continues to increase, see below data collected by ASIC in regards to active accounts from 2015 – 2019. There are over 3.7million active BNPL accounts in Australia as of 2019. However, this number is to be significantly higher now.

Number of Active BNPL Accounts Australia : Source ASIC

BNPL services in the Asia-Pacific region will more than double over the four years to 2024, growing largely at the expense of credit cards, bank transfers, and prepaid cards, Fidelity National Information Services Inc. said in its Global Payments Report 2021.

BNPL accounted for 10% of all e-commerce transactions in Australia in 2020, FIS said.

Prophets Take:

Whilst Afterpay is undeniably an Australian Sucess story it will be somewhat sad to see the ticker from the ASX boards, especially after returning to investors an excess of 3000% gains since their IPO.

We imagine there will be more sector consolidation as larger entrants start getting FOMO and wanting to have a slice of the Buy Now Pay Later Pie for their own company.

Squares influence in the payments space may also prompt a land grab for other payment companies such as PayPal, Mastercard, Apple or Google to start hunting for other ASX listed success stories such as Zip co or others to prevent the hassle of having to re-invent the wheel.

However sad it will be to see APT disappear from ticker tapes around Australia, this was an undeniable success story and Well Done to All Holders.

Disclosure. We first bought into Afterpay at $2.78 a share and are a big fan of the BNPL Sector.

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