Jack Dorsey’s Square to buy Afterpay in $39bn deal
Buy now, pay later darling Afterpay has cemented its rise from an eBay side project to one of Australia’s all-time tech success stories.
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Buy now, pay later darling Afterpay has cemented its rise from an eBay side-project to one of Australia’s all-time tech success stories, with the company set to be acquired by US payments giant Square for $39bn in the largest deal in Australian corporate history.
Afterpay and Square — whose founder and chief executive Jack Dorsey is also the co-founder of Twitter — on Monday announced the all-scrip deal, under which Square will acquire all of the issued shares in Afterpay by way of a recommended scheme of arrangement.
The proposed deal values Afterpay at $126.21 per share, a 30 per cent premium to a last week’s closing price of $96.66 but below February’s highs around $158.
It implies an enterprise value of around 40 times the target’s estimated 2021 revenue and is expected to contribute to Square’s gross profit in the first year after completion.
Afterpay shares surged after news of the deal, soaring to $124.70 in early trade on Monday, before closing up 18.8 per cent at $114.80.
The $US29bn ($39bn) valuation is based on Square’s $US115bn market capitalisation on July 30 and Afterpay’s board has unanimously recommended the transaction, with co-founders Anthony Eisen and Nick Molnar to join Square when the deal completes.
“The transaction marks an important recognition of the Australian technology sector as homegrown innovation continues to be shared more broadly throughout the world,” Mr Eisen and Mr Molnar said.
Mr Molnar’s current stake of 6.87 per cent means the deal is worth $2.68bn for him, while Mr Eisen’s 6.72 per cent stake equates to a $2.62bn windfall.
Meanwhile, the news lifted shares across the payments sector on Monday, as Zip jumped 9 per cent, while Splitit jumped 8.7 per cent. Sezzle grew 3.7 per cent, Humm rose 3.7 per cent and Openpay lifted 4 per cent.
Following the deal, which is understood to have been struck after six weeks of discussion, Afterpay’s business will be folded into Square’s existing Seller and Cash App units.
It will expose Afterpay to a larger slice of the online global payments system, which Square forecasts to hit $US10 trillion by 2024.
Currently, the buy now, pay later sector accounts for roughly 2 per cent of online payments globally. However, Square expects that slice to grow by 10 per cent annually through 2024.
While Afterpay counts nearly 100,000 merchants and more than 16 million shoppers globally among its customers, that is dwarfed by Square’s reach of more than 70 million Cash App customers annually and millions of sellers.
Meanwhile, Cash App tools including money transfer, stock and bitcoin purchases will become available to Afterpay customers.
“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,” Mr Eisen and Mr Molnar said.
“By combining with Square, we will further accelerate our growth in the US and globally, offer access to a new category of in-person merchants, and provide a broader platform of new and valuable capabilities and services to our merchants and consumers.
They added that the deal was a milestone one for Australia’s technology ecosystem.
“It also provides our shareholders with the opportunity to be a part of future growth of an innovative company aligned with our vision.”
Mr Molnar said he and Mr Eisen will stay in the US and Australia respectively after the mooted deal closes.
“I’m currently in the US, and I’ve broadly been here the last three years, and Ant is in Australia. I don’t see a change to that,” he said in an interview. “Our goal is how we play a role in joining Square, in integrating our businesses into the seller and Cash app ecosystems to really unlock that strategic opportunity that’s in front of us. And to be honest, I couldn’t be more excited about what that represents.
“The more that we’ve gotten to know Jack [Dorsey], Amrita [Ahuja, chief financial officer], Alyssa [Henry, head of Square’s sales business] and Brian [Grassadonia, head of CashApp] and the entire Square leadership team, the more it’s become clear about our alignment, our ways of working and our joint belief in the opportunity in front of us. So, the ability to bring this partnership together is incredibly exciting.”
Market analysts also saw competitiveness in the combined business, with Citi saying it would place both Afterpay and Square’s Cash App and Seller businesses in a much stronger position to succeed, especially in the US.
“In our view the sale also reflects the increasing competition in the sector and the importance of scale, especially on the consumer side,” Citi analysts said in a research note.
They noted a structural trend towards BNPL and installment payments was still “in its early innings”, pegging Afterpay as the market leader.
Square, an American financial services and digital payments company based in San Francisco, was founded in 2009 by Jack Dorsey and Jim McKelvey. It offers merchants payment technology including contactless eftpos machines and devices and a cash application for peer-to-peer payments.
Square generates about 85 per cent of its revenue from the United States and Australia is its largest international market.
The Afterpay deal, its biggest ever, builds on an ambitious start to 2021, in which Square has also bought a majority stake in music streaming service Tidal -- for $US297m -- and announced a bitcoin business unit.
It also sets up a showdown in payments between Square and Apple, which is reportedly working on a similar “buy now, pay later” service known internally as “Apple Pay Later”.
In an interview, Square CFO Amrita Ahuja said the company has “long admired Afterpay not only for the industry attributes in which it operates, but because of this team, because of their execution, their discipline and their vision.
“In particular, Nick and Ant and their key management really are exemplary in terms of their entrepreneurial leadership, so we’re really excited that we get to work together,” she said.
Meanwhile, the deal is being hailed by Australia’s tech industry as one of the most significant for the sector in years.
Earlytrade co-founder Guy Saxelby described the acquisition as proof that Australian founders should hold on and keep growing, rather than cash out their billion dollar ideas early for only millions just because an offer is from the US.
“The $39bn value is unheard of at 75 times revenue which is basically Jack Dorsey saying he’s happy to wait 75 years to get a return on the investment,” he said.
“Afterpay is a stunning example of how Australian founder-led companies can make an impact on the global stage with great ideas and flawless execution.
“The Aussie tech scene has traditionally considered itself an R&D testbed for the US, where our founders sell-off their brilliant ideas and tough slog far too early and far too cheaply.
“We can take a more confident — more Australian — view of our position in the global tech scene.”
Liberal Senator Andrew Bragg, who chairs a Senate inquiry into Australia’s fintech industry, said he was “very concerned” about the ongoing consolidation of Big Tech, payments and financial services, and that “we want competition not concentration.”
“Consolidation risks should be assessed as part of the regulatory approvals,” he said.
Australia’s competition watchdog said it will “carefully consider” the merger.
“It is early days and this proposal has just been notified to us, so we will consider it carefully once we see the details,” an ACCC spokeswoman said.
Following completion of the deal, which is expected in the first quarter of calendar 2022, 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.
Square has agreed to establish a secondary listing on the Australian Securities Exchange (ASX) to allow Afterpay shareholders to trade Square shares via CHESS Depositary Interests (CDIs) on the ASX. Afterpay shareholders will be able to elect whether to receive the Consideration in NYSE listed Square Class A common stock or CDIs.
Square is advised by Morgan Stanley, while Afterpay is advised by Goldman Sachs and Highbury Partnership.
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Originally published as Jack Dorsey’s Square to buy Afterpay in $39bn deal
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