Afterpay takeover open to question

A severe sell-off in Square Ltd suggests the takeover of Afterpay would not happen on the same terms today.

Outside the Afterpay HQ in Surry Hills, Sydney. The biggest takeover in Australian history – the $39bn acquisition of Afterpay by Square – has been delayed unexpectedly. Picture: NCA NewsWire / Nikki Short

Four months ago the biggest takeover in Australian history – the $39bn acquisition of Afterpay by Square – hit the headlines.

The deal, now delayed unexpectedly, looked attractive at the time as Australia’s champion buy now, pay later stock was bought at a premium by Jack Dorsey’s diversified financial services group.

Lucky Afterpay shareholders were to transfer into Square on a deal that was worth about $126 a share.

But here we are in December and the gloss is fading fast from the deal as Square has been sold off furiously in a sector-wide offloading of US growth stocks.

Because it is a scrip-only deal, Afterpay shareholders are now locked into a future with Square and the US stock is showing no signs of a turnaround after its latest results disappointed the US market. Square was trading above $US250 at the time of the deal announcement, but has been falling consistently since that time. Today it is around $US179.

No wonder Afterpay is sinking on the ASX. It was worth near $130 when the deal was struck. Today it is closer to $95.

Which raises at least one big question – was the deal, in which Afterpay shareholders were offered 0.375 Square shares for each Afterpay share, good enough?

Asked if the terms would be the same if Afterpay received its bid from Square this week, Wilsons’ John Lockton – a long-time Afterpay supporter – says: “You’d have to think that Afterpay would be looking for a better deal.”

Analysts point to the gap between how the two companies have been faring since the deal was struck. They have both been sold off, but Square has been much more heavily sold down than its target Afterpay.

Unfortunately for Afterpay shareholders, the Square all-scrip deal means that Afterpay’s relative health compared to Square is not to be compensated. On the upside, there is the promise of a long-term future inside a much larger enterprise with global reach, the factor that persuaded key players to back the deal in the first place.

Meanwhile, the actual formal tie-up between the two companies has been delayed after a surprise hold-up in matters relating to the Afterpay European subsidiary, ­Pagantis.

Could the whole deal unravel? Jun Bei Liu of the Tribeca Alpha Plus Fund says: “I don’t think so. It is very much a done deal. I would put the risk of trouble for the deal as being very slim.”

Still, any uncertainty does not help the wider Australian BNPL sector, which has long been spearheaded by Afterpay. BNPL stocks are being hammered as investors jettison overpriced stocks where profits are modest or missing.

Former favourites such as Zip and Sezzle are down heavily. Even Humm, the BNPL stock that somehow never managed to catch the upswing, is nonetheless being sold down by traders.

Despite these issues, the Square takeover is expected to go ahead.