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Afterpay’s $29 bln Square deal taps new reality

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MELBOURNE, Aug 2 (Reuters Breakingviews) - Tapping into the Olympic spirit, Afterpay (APT.AX) is setting a new Australian record. In the country’s biggest merger, the unprofitable instalment-payments darling agreed to sell itself for A$39 billion ($29 billion) to Square (SQ.N), the U.S. company led by Jack Dorsey and best known for developing a credit-card reader used on mobile devices. The price tag, at a discount to its recent high, acknowledges a new market reality.

Co-founders Anthony Eisner and Nick Molnar defied sceptics to build a buy-now-pay-later service with some 16 million customers and 100,000 merchants. Annual revenue of just under A$1 billion has nearly doubled in each of the past two financial years, with even faster growth in the United States. The shares have swelled an eye-popping 96-fold since Afterpay’s 2016 initial public offering.

They were more valuable earlier this year, however. By Friday, the price had tumbled some 40% from its February all-time high. To some extent, that reflects jitters about formidable new rivals.

There have been consistent threats. Peers including Zip (Z1P.AX) in Australia and Affirm (AFRM.O) in the United States, as well as incumbent banks like Commonwealth Bank of Australia (CBA.AX), all have rolled out copycat products. They have mostly been shrugged off by investors, however. PayPal’s (PYPL.O) recent decision to turn on a competing service attracted greater attention, as did media reports that Apple (AAPL.O) is working on something similar.

Square is paying a sky-high 42 times sales for the target’s financial year to the end of June, including the 30% premium to Friday’s closing price. And yet Dorsey is clearly keen to find new engines of growth, having delved into cryptocurrency and even buying Jay-Z’s music-streaming service Tidal. Afterpay makes decidedly more sense, considering Square can offer its 70 million customers something new and popular.

For Afterpay, teaming up with $113 billion Square gives it deeper pockets to withstand the stiffer competition. It also hands off a sizeable chunk of the regulatory risk as consumer groups and financial authorities probe the business model of essentially extending free point-of-sale loans. Those are pretty good reasons to sell now for a better chance of success later.

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CONTEXT NEWS

- Square said on Aug. 1 it has agreed to buy Australia’s Afterpay for A$39 billion ($29 billion) in an all-stock deal.

- The exchange ratio of 0.375 Class A Square shares for each Afterpay share implies a price of A$126.21 a share, a roughly 31% premium to where they were trading on July 30. Afterpay shareholders are expected to own about 18.5% of the combined company.

- Square, whose flagship credit-card scanner attaches to mobile devices, has the option to pay up to 1% of the deal value in cash. Afterpay allows shoppers to buy goods immediately and pay for them in instalments.

- As part of the transaction, Square will establish a secondary listing on the Australian Securities Exchange.

- Afterpay’s board has unanimously recommended the deal to its shareholders and the two companies expect the transaction to close in the first quarter of 2022.

- Morgan Stanley is advising Square while Goldman Sachs and Qatalyst Partners are advising Aftepay. Highbury Partnership is advising Afterpay’s board.

Editing by Jeffrey Goldfarb and Katrina Hamlin

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