Last week, the US listed business Square announced plans to takeover Afterpay in a deal that valued the Australian company at $39 billion, making it the biggest acquisition in Australian corporate history.
As Afterpay is a significant holding in your portfolio, I wanted to share some insights directly from the manager, and outline what the acquisition means for you. The direct shares in your portfolio have been selected by some of Australia’s leading fund managers, one of whom, Hyperion, has been a long term investor in and believer in the Afterpay story. Since it’s listing, Hyperion are one of the few institutions to consistently back Afterpay, as evidenced by the fact it is the largest holding (about 11.5% of the fund) in the Hyperion Australian Growth Companies Fund. This fund is included in the AAN Growth, Core and Australian model portfolios and for investors in those models, Afterpay is one of your largest direct holdings.
Upon learning that a takeover was being discussed, the investment team at Hyperion weren’t particularly happy, initially, as they were concerned that one of their highest conviction ideas was about to be taken out. When Hyperion Deputy CIO Jason Orthman caught up with our own Jeff Thurecht for a chat earlier in the year, he mentioned that as a firm they never want to lose companies to takeover, because they want investors to be able to enjoy that growth for the next 10 to 20 years.
What will happen to my Afterpay shares?
In terms of the mechanics, it is expected that your investment in Afterpay will be replaced with Square shares in the 1st quarter of 2022, and for every 1 share you own this will be replaced by 0.375 Square shares.
Square shares will be listed in Australia via what is called a Chess Depositary Interest or CDI.
Importantly Afterpay has confirmed that they will ask the ATO to rule on the scrip for scrip capital gains tax rollover relief, which means that you may only pay capital gains tax on the appreciation from the new share price, not from when you bought the shares originally.
How is Square different to Afterpay?
Square believes that there is structural change happening in buyer behaviour and how people pay for goods and services. They know that Afterpay has a strong relationship with the Millennial and Gen Z consumer and over time they will become more important in the marketplace.
Square’s product set is broader and significantly more comprehensive than Afterpay’s. Afterpay is a single product company and developed the buy now pay later (BNPL) model in Australia in 2015, which it has exported successfully to the world and made headlines thanks to the public backing of their model by Kim Kardashian West. More recently the BNPL industry has also been validated by the entrance of large players such as PayPal and Apple Pay. In contrast, Square through its Cash App (launched in 2013) offers consumer products across Peer to Peer transactions, banking, stock and bitcoin trading, government social security and taxes.
Is the takeover a good deal for you?
It is the view of several managers that we work with, including Hyperion, that this takeover is a positive for investors. It will add value to your investment through an increase in liquidity, an appreciation in the value of your investment and will leave you with an investment that is more diversified than it is at present.
Hyperion have confirmed that they intend to retain their current holdings and are of the view that the marriage will release massive synergies, paving the way for decades of growth.
