Afterpay Touch: Square acquires Afterpay

About the author:

Richard Coles
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%.

Further commentary: 

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.

Investment view: 

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 call.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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