“Exquisite timing”: Square lobs record $39bn offer for Afterpay

George Lekakis

Afterpay’s army of Australian investors are set to join the share register of the Nasdaq-listed Square merchant payments business if a A$39 billion merger deal is completed early next year.

The deal is set to be the largest buyout of an ASX-listed company, trumping the $33 billion sale of Westfield to France’s Unibail-Rodamco in 2017.

Square and Afterpay announced the blockbuster transaction on Monday, saying they planned to combine their operations by the end of March to create a “compelling” payments business aimed at both consumers and merchants.

Under the deal, which has unanimous backing from the Afterpay board, Square is proposing to acquire the buy now pay later provider with an all scrip offer that would leave the target’s shareholders with an 18.5 per cent interest in the combined entity.

Square founder and CEO Jack Dorsey said his company would apply for a secondary listing on the ASX to accommodate Afterpay’s Australian-based shareholder base.

“Square and Afterpay have a shared purpose,” Dorsey said.

“We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

The deal is contingent on a raft of conditions, including approval from the Australian Taxation Office for capital gains tax rollover relief for Afterpay shareholders.

It also requires approval from shareholders of both companies and a green light from Federal Treasurer Josh Frydenberg.

Australian payments experts have been highlighting strategic weaknesses in the business models of domestic BNPL schemes in recent months and many believe that the buyout deal is a silver bullet for Afterpay.

“The timing is exquisite,” said Grant Halverson, principal of McLean Roche.

“Afterpay sales volumes appear to have peaked in Australia and New Zealand.

“Most investment analysts seem to have overlooked that there was an 18 per cent decline in sales in Australia and New Zealand in the March quarter.”

Sydney payments consultant Bradford Kelly said Afterpay had a strategic interest in selling the business because it did not have scale in the US market and faced material challenges from the likes of Citibank, PayPal and Commonwealth Bank in its home markets.

“The buy now pay later market is saturated in the US and Afterpay is staring at competition from the world’s largest payments company and Australia’s largest bank,” he said.

“That makes it a good time to sell.”

Square’s offer values Afterpay scrip at $126.21, which means that investors who bought into the company in January and February when the share price was trading above $140 will be out of the money.

Halverson believes Afterpay shareholders will wear most of the risk if the deal proceeds because future returns will hang on Square being able to execute its ambitious global strategy.

Afterpay co-founder and CEO Anthony Eisen talked up the accretive benefits of the deal for his shareholders.

“The transaction marks an important recognition of the Australian technology sector as homegrown innovation continues to be shared more broadly throughout the world,” he said.

“It also provides our shareholders with the opportunity to be a part of future growth of an innovative company aligned with our vision.”

Eisen and co-founder Nick Molnar said they would be joining the Square management team after the transaction is consummated to take up senior roles in overseeing the company’s consumer and merchant businesses.

One Afterpay director is also expected to join the Square board.

While Afterpay scrip rallied more than 25 per cent to an intra-day high of $125, it closed at $114.80 - a significant discount to the buyout offer on concerns that the deal might not proceed.

However, news of the deal appeared to trigger a rally in other ASX-listed BNPL providers, with Zip and Openpay closing up 9 per cent and 4 per cent, respectively.