The Afterpay Ltd (ASX: APT) share price is going nuts after agreeing to a takeover by Square Inc (NYSE: SQ).
Afterpay share price to go nuts on takeover
The Afterpay share price is going crazy after the buy now, pay later business agreed to a takeover by the payments giant Square.
This deal values Afterpay at $39 billion. Square is going to pay for it by issuing new Square shares to Afterpay shareholders.
Based on Square’s closing price of US$247.26, the deal represents an implied price of $126.21. That’s a premium of approximately 30.6% to Afterpay’s last share price of $96.66. However, it only represents a 10.5% premium to the average price over the last 30 days.
Afterpay shareholders will receive a fixed exchange ratio of 0.375 shares of Square shares for each Afterpay share. The shareholders of Afterpay will own close to a fifth of Square if the deal goes ahead.
But it’s not a done deal. Afterpay will apply for a ruling from the ATO for share-for-share capital gains tax rollover relief. This transaction is intended to be tax-free for Afterpay shareholders in Australia. The receipt of confirmation of this ATO ruling is a condition for the transaction.
The Afterpay board has unanimously recommended the transaction.
Square to list on the ASX
Square has agreed to establish a secondary listing on the ASX to allow Afterpay shareholders to trade Square shares through a CHESS depositary interest (CDI).
Why combine the two businesses?
Aside from the Afterpay share price rising, there could be other benefits for Afterpay shareholders from joining with Square.
Both businesses are expected to be improved by combining the two ecosystems.
Square said it will bring value, differentiation and scale to Afterpay. It will expand Afterpay’s reach with Square’s large and growing customer base of more than 70 million annual transacting active cash app customers and millions of sellers.
Square believes Afterpay will add to gross profit growth with a “modest” decrease of adjusted EBITDA (EBITDA explained) margins in the first year after completion.
However, Square sees an opportunity to invest behind Afterpay’s “strong” unit economics as well as attractive growth synergies.
Summary thoughts on the deal and the Afterpay share price
Considering where the Afterpay share price has been over the last six months, it doesn’t seem like a fantastic price. However, some investors may argue it’s not worth as much as it was priced at, so perhaps most shareholders are getting a good price. But some investors may not be happy.
Afterpay shareholders may get better long-term growth potential under Square though. More competition is entering the BNPL space.
The company also released a trading update.
It’ll be interesting to see if the deal goes ahead.