It’s been the biggest mystery in the market: how much is Afterpay really worth?
Turns out it’s worth $126.21 a share: that’s the value estimate underlined in a spectacular takeover deal announced by Square, a very odd conglomerate run by Twitter founder Jack Dorsey.
To the delight of the local market, that price turns out to be at the upper end of a notoriously dramatic range – it’s almost three times higher than the UBS valuation at $42, but less than the Ord Minnett valuation of $150.
And it doesn’t matter now that Afterpay couldn’t make a profit. Or that the regulators are circling or indeed that the company had embarked on a wildly ambitious plan to dominate world markets – such variables now become issues for New York-listed Square.
Similarly, the signs are that Wall Street will take the Square bid in its stride: when it comes to this conglomerate with interests in everything from crypto to music streaming, you either back the vision of Dorsey or you don’t.
Who wins? Local tech gets a leg-up and the rest of the BNPL swag of listed wannabes should also benefit. BNPL stocks moved ahead in a predictable pattern, with Zip Co the biggest mover gaining 9 per cent (despite being the most shorted stock on the ASX) and Humm up 3.7 per cent.
Fund managers were quick to blast those who never “believed” in Afterpay after the deal was announced. Joe Magyer of Lakehouse Capital said: “Nobody was paying attention – fund managers ignored Afterpay because they are middle-aged wealthy blokes who don’t understand the appeal. The losses scared off many investors but businesses that could grow that quickly clearly had good mojo.”
Indeed, mojo was never lacking here, only profits, regulation and any moderation of ambition. That’s probably why several fund managers publicly gave up on Afterpay at various times. Cyan Investment Management – which bought in at $1 – sold out in 2019 near $30, with Dean Fergie suggesting at the time he did not want to be distracted any longer by the mystery of worrying how much Afterpay was worth.
More typically, many professional investors only half believed the Afterpay story and literally bought and sold the stock as it took its rocky but ultimately successful road towards Square.
Emanuel Datt of Datt Capital loudly congratulated the deal, saying: “We have invested in Afterpay a number of times over the past three years with pleasing results, although we are not currently a holder of the stock.”
It looks likely the Square takeover will succeed.
Though there will of course be foreign investment regulations to clear and not every investor will be content with the price. The offer is putting forward a full takeover premium on a stock that traded at a record of $160 in February and has shown little sign of retesting those levels of late.
As one investor put it: “It’s exquisite timing, they have played it perfectly and they had gone as far as they could go – there was no way they were going to get away as lightly in Washington as they did in Canberra on regulation – and they also knew the payment giants such as PayPal really were winding up to take them on.”
The combined group (which is expected to be dual-listed on Wall Street and in Australia) is expected to become a serious rival to all providers of credit cards and banking services – it may also fill a gap in the Square selection of services, which remains a puzzle to many observers.
As it stands, Square’s operations in Australia have already been making some inroads in the payments and small business finance market with a minimum of marketing or advertising.
According to its most recent accounts, Square has invested $50m into the Melbourne-based local unit – there is now an esteemed $100m head office capital in Square Australia with about 150 staff, according to banking publication Business Day.
For investors, the real impact of this $39bn takeover is more likely to be on the listed banks rather than the surviving BNPL players. There is no other Afterpay out there, despite some decent attempts to emulate or innovate on the model.
Rather, the “big four” now have one of the world’s potentially most powerful financial forces on their doorstep in the shape of Square and Afterpay combining to have a crack at the Australian market.
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