- Square Inc launches US$29bn takeover of Afterpay Touch
- Afterpay owns 90 per cent of Clearpay and ThinkSmart owns 10 per cent stake
- Call arrangement on 10 per cent Clearpay stake can be exercised early in the event of change of control of Afterpay.
- ThinkSmart’s shares trading 38 per cent below sum-of-the-parts valuation.
Afterpay Touch (APT:ASX – A$114.80), a A$36bn (£20bn) market capitalisation Australian Stock Exchange-listed technology group, has recommended a US$29bn (A$39bn) all share takeover for the company from New York Stock Exchange listed Square Inc (NYSE:SQ.), a US$113bn fintech group. The offer of 0.375 new Square share for every one Afterpay share values the Australian stock at A$126.21, a 30 per cent premium to Friday’s closing price. Afterpay’s share price rallied 18 per cent during Australian trading hours, but trades 10 per cent below the implied offer price. Subject to shareholder approval, the transaction is expected to complete in the first quarter of the 2022 calendar year.
Combining the two group’s makes strategic sense. Square’s chief executive and co-founder Jack Dorsey points out that “Square and Afterpay have a shared purpose. 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,” adding that “together, we can better connect our cash app and seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.”
Afterpay, the pioneering global 'buy now, pay later' (BNPL) platform serving more than 16m customers and nearly 100,000 merchants globally, presents an attractive proposition. That’s because the BNPL market is supported by shifting consumer preferences away from traditional credit, especially among younger consumers, and offers consistent demand from merchants for new ways to grow their sales, and the global growth in omnichannel commerce.
Square’s plan is to integrate Afterpay into Square’s existing seller and cash app business units, enabling even the smallest of merchants to offer BNPL at checkout; offer Afterpay consumers the ability to manage their instalment payments directly in cash app; and give cash app customers the ability to discover merchants and BNPL offers directly within the app.
The main benefit for Afterpay’s shareholders is that it will benefit from Square’s large and growing customer base of more than 70m cash app customers and millions of sellers, thus extending its geographic reach especially in North America.
The proposed takeover is highly relevant to Aim-traded finance company ThinkSmart (TSL: 88p) which holds a 10 per cent stake in Clearpay, a fast-growing UK payment platform that enables consumers to split the cost of retail purchases into interest-free payments. The other 90 per cent is owned by Afterpay and is subject to a call/put arrangement exercisable in 2023/24. However, in the event of a change of ownership of Afterpay, the Australian group has the right to exercise its call option at any time following said change of control (which is expected in the first quarter of calendar 2022). The exercise price for the call option will be determined by the same pre-agreed valuation principles whether or not the option is exercised early. ThinkSmart's 10 per cent holding in Clearpay was last valued at £106.6m (100p per ThinkSmart share) on 31 December 2020.
Bearing this in mind, Afterpay has just released annual results for the 12 months to 30 June 2021 which reveal that Clearpay’s customer base more than doubled to 2.1m in the period (representing 13 per cent of Afterpay’s total customers) and it more than trebled underlying sales to A$1.9bn (8.5 per cent of the total). The point is that Clearpay has to be worth at least 10 per cent (if not more) of Afterpay which is itself being valued by Square at US$29bn (£21bn). Thinksmart’s 10 per cent stake in Clearpay therefore has a read through valuation of £216m, and £140m (132p a share) on a fully diluted basis.
In other words, although Thinksmart’s share price has rallied 43 per cent to 88p this morning, it still represents a hefty 33 per cent discount to the read through valuation of the company’s 6.5 per cent fully diluted stake in Clearpay. ThinkSmart also held £10m (9p a share) of other net assets including net cash of £6.9m at the end of 2020.
The share price discount is anomalous given that there is a huge incentive for Afterpay to acquire ThinkSmart’s 10 per cent stake in Clearpay early next year in light of the change of control, so ThinkSmart’s share price is set to re-rate significantly in the interim to narrow the valuation anomaly.
ThinkSmart’s shares have produced a 545 per cent total return since I initiated coverage, at 14p, in my April 2020 Alpha Report, and I last advised buying, at 74p (‘Exploit two small-cap pricing anomalies’, 3 March 2021). Priced on a 38 per cent discount to my 140p sum-of-the-parts valuation, they rate a strong buy.
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