Afterpay Touch: Square acquires Afterpay
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 03 August 2021, 7:30 AM
- Sectors Covered:
- Insurance, Diversified Financials
- Square will acquire APT via a Scheme of Arrangement which values APT at
~A$39bn (based on Square’s closing share price of US$247.26).
- The deal premium is 31% above APT’s last closing price (but under APT’s highs
seen in Feb-21, ~A$150 - although we acknowledge the rotation away from tech
since that period).
- The strategic combination of Square and APT makes clear sense, in our view, with
both players able to leverage the other’s existing client base to drive growth. For
APT, we also think joining with Square’s diverse product set positions the company
to better weather increasing competition in the BNPL space.
- APT’s quarterly saw a solid set of numbers with FY21 revenue (A$925m) largely
in-line with market expectations and the recent trend of broadly stable margin
performances continuing despite rapid growth.
- We lower our APT FY21F/F22F EPS by 27%/8% (off relatively low bases) and
maintain our Hold call with APT largely trading in-line with our valuation.
Square set to acquire APT:
Square will acquire APT via a Scheme of Arrangement which values APT at
~A$39bn (based on Square’s closing share price of US$247.26) – paid in all stock.
The implied price is A$126.21 per APT share (+31% premium to last close, +22%
premium to the 10 day VWAP). As part of the arrangement, Square has agreed to
set up a secondary ASX listing (via CDI’s). APT shareholders will be able to elect
receiving Square’s NYSE listed Square Class A common stock or CDI’s.
Square has said APT will be integrated into its Seller and Cash App. The benefits
of deal are seen as Square utilising APT to increase its seller ’s sales and driving
new merchants onto its seller ecosystem. The deal also creates opportunities to
give APT consumers access to Square’s Cash Apps broad product suite and
introduce APT merchants to Cash Apps extensive customer base.
APT has also released its 4Q21 update. The key group metrics were FY21
underlying transaction value (A$21.1bn) being up 90% on pcp, Active customers
(16.2m) being up 63%, merchants (98.2k) rising 77% on pcp. FY21 revenue of
A$925m came in broadly in-line with Factset consensus (A$922m), while APT
pointed to stable revenue margins and a 2H21 net transaction margin >2%.
While the deal price is a 31% premium to APT’s last close, we do note the deal
price is ~21% under APT’s highs seen in Feb-21 (although we acknowledge the
rotation away from tech since that period). Nevertheless, we feel an acquisition
price of 42x FY21 revenue is likely fair at this point of the market cycle.
In our view, the strategic combination of Square and APT makes sense, given the
opportunity for both players to leverage each other’s existing client bases to drive
further growth. On this, we note both APT and Square’s Cash app are primarily
skewed to Millienial/Gen Z consumers, while their merchant ecosystems appear
complementary with different areas of strength (outlined later in this note).
From an APT perspective, we also think joining with Square’s diverse product set
positions the company to better weather increasing competition in the BNPL space
(noting Paypal and Apples recent sector entries).
On APT’s quarterly, we saw it as a solid set of numbers with revenue largely per
consensus, and continuing the recent trend of broadly stable margin performances.
Forecast and valuation update:
We downgrade our APT’s FY21F/F22F EPS by 27%/8% (off relatively low bases)
reflecting slightly reduced revenue growth forecasts in future years. Our PT rises
marginally (login to view target price), with our earnings changes offset by a
valuation roll forward and a lift to longer-term growth assumptions.
Today’s acquisition of APT by Square is another feather in the cap of APT’s
management team and highlights the value they’ve created since listing. Whilst the
deal price is below APT’s all time share price highs, we think linking with Square
makes strategic sense from both a growth and competitive positioning perspective.
However with APT largely trading in-line with our current PT we maintain our Hold
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