Analysing the biggest M&A deal in ASX history, with early Afterpay investor Dean Fergie
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The bid from US payments firm Square Inc to acquire BNPL leader Afterpay (ASX:APT) is likely to reverb across the ASX for a while yet.
More or less from the start — and particularly since its post-COVID surge — the outlook for BNPL has generated a distinct lack of consensus among sophisticated investors and analysts.
For most of 2021, Morgan Stanley valued Afterpay above $100 per share, while UBS thought it was closer to $30.
Evidently, Jack Dorsey thinks it’s worth $126.21, which is what Square has proposed to buy it for in a share-based deal that will mark the largest corporate takeover in ASX history.
Portfolio manager Dean Fergie, from Cyan Investment Management, was in early on the Afterpay story and has tracked the sector since Cyan first invested in APT stock below $3 in 2016/17.
Speaking with Stockhead following yesterday’s announcement, Fergie flagged some potential benefits that could flow from the Afterpay/Square tie-up. But he doesn’t view the deal as a bellwether for Australia’s tech sector.
“I don’t necessarily think it will act as a catalyst for further optimism towards Australian tech among global investors,” he said.
“I think APT’s built something pretty unique that’s also gained traction globally, and that’s what’s been attractive to an international player like Square.”
In a sector that prompts wildly divergent views about what companies in the space are worth, Fergie said the APT deal does draw something of a “line in the sand” in terms of how BNPL stocks are valued.
The broader sector followed APT’s lead yesterday to post some solid gains. But it’s unlikely to prompt a scenario where other BNPL stocks become takeover targets, Fergie said.
“The opposing view is that the best player has been picked now, and it’s becoming part of an even bigger organisation. Which means the smaller players become more marginalised, and the competitive landscape becomes tougher,” he said.
“So I look at it as something that has the potential to have a short-term positive impact, but long term those competitive headwinds are still there.”
Square Inc’s offer marked a premium of around 30% to last Friday’s closing price of $96.66.
However, Fergie said it’s likely that some investors would’ve been hoping for “a higher premium” in light of the stock’s post-COVID rally.
The per-share valuation of $126.16 marks a discount of around 20% to Afterpay’s intraday high of $158.47 on February 10 — just before some rumblings in the bond market prompted the first rotation out of high-growth tech stocks.
In late February, Afterpay co-founders Nick Molnar and Anthony Eisen both sold 450,000 shares — around $60m worth of APT stock — at $134.46 (they still both own more than 18m shares each through direct and indirect interests).
“It’s a share-based deal as well which isn’t quite as attractive as cash. I can’t really see another player coming in and trumping that bid,” Fergie said.
“So for really bullish investors, it might be a slightly disappointing outcome from a price perspective but longer-term, I think it does look like a good strategic tie-up.”
“I think Square has a strong platform with respect to merchants, and APT is a consumer-facing business. So if you want to look at that broader ecosystem of merchants and customers, I think there are some cross-selling opportunities with that merged entity.”
“Selling Square tech to Afterpay’s merchant customers, and getting consumers more wedded to Square platform. I’m not an expert on Square, but on the face of it it does seem to make for a good matchup.”
In terms of the outlook for the sector more broadly, Fergie reiterated his view around the battle for scale as the sector reaches its consolidation phase.
“The barriers to entry in this sector aren’t high. Afterpay got in as as a first mover, and they’ve got a few tech advantages but it’s not that complex what they’re doing,” Fergie said.
“I was on the internet the other day with PayPal, and I got a prompt to either pay now or ‘pay in 4’ — so everyone’s doing it now and you’ve kind of got to think; where is the value?”
“In terms of finding the next winner, you’re sometimes better off looking outside the space. It’s a crowded sector and I don’t think there’s going to be another player that really hits it out of the park,” Fergie said.