As investors mull Square’s AUD$39 billion bid for Afterpay, one investment bank dramatically raised their price target (PT) on the BNPL leader.
- Afterpay share price proves volatile following Square's AUD$39 billion takeover bid
- The exact takeover price remains 'undecided'
- Macquarie raises their price target on APT from $140 to $160 following this news
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The perils of buyouts
Once an acquisition bid is announced and especially when a company’s Board has agreed and endorsed such a deal, the share price of said company will typically trade up to or around the takeover offer price.
There are some qualifications to this of course. Perhaps the market believes that the takeover will be knocked down by regulators, or maybe it won’t be approved by shareholders, despite being endorsed by the Board.
In such cases, you’ll see that uncertainty ‘priced into’ the stock – that is, it will usually trade a bit below the takeover bid.
Centrally, the deal won’t be paid in cash, but in scrip or stock. Essentially, once we reach the record date – currently earmarked for the first quarter of CY22 – for every Afterpay share held by investors, they will receive 0.375 Square shares.
In legalise, 'all of the Afterpay Shares held by Scheme Participants at the Record Date will be transferred to Square Acquirer.'
(While we say all-scrip, it should be noted that there is an option for Square to fund 1% of the acquisition through cash.)
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But there’s more
For reference, Square also noted that it had agreed to create a secondary listing on the ASX – so that investors wouldn’t have to hold US stock or be exposed to currency moves.
In the wake of all this a few things happened.
Immediately following the announcement of the takeover, the Afterpay share price surged, but it did not hit the implied bid price of $126.21 per share. Rather, the stock closed Monday’s session at $114.80 per share, up an impressive 18% but still ~10% below the Square bid.
At the time we wrote this could have been reflective of concerns over shareholder or regulatory approval. Though in retrospect it has more to do with Square’s share price – and the volatile price that comes with holding such a stock.
With Square announcing the takeover on Sunday (US time), and Afterpay’s stock surging on Monday (Australian time), there remained much uncertainty as to how the market would react to the announcement on the Square side.
That likely explains the 10% gap we saw on Monday.
Yet the market responded with sensational enthusiasm when US trade commenced on Monday, with Square finishing out the session up 10.16% to US$272.38 per share.
Afterpay share price to remain watched
So, with Afterpay’s share price now leveraged to Square’s share price – it was unsurprising that the stock also surged on Tuesday (Australian time), with APT closing out the session 11.3% higher.
That’s certainly not the end of the story though.
On Wednesday, Macquarie analysts came out and revised their price target on Afterpay, bumping it from $140.00 per share to $160.00 per share.
This was based on the investment bank’s price target of US$325 per share for Square, ‘adjusted for the proposed scrip ratio’, while also factoring in currency fluctuations.
Analysts from the investment bank note that while Square's offer implies a premium to the sector's average, such a valuation is justified given Afterpay's above-average growth levels.
'As seen in the company’s Q4 release merchant and customer additions have maintained vs. a declining trend by smaller peers,’ Macquarie said.
Ultimately, assuming the deal goes through, and with Afterpay’s valuation now essentially tied to Square’s share price, volatility is likely to remain a fixed feature of both companies for some time.
More to come.
Shane Walton | Financial Writer, Australia
04 August 2021