Which funds will benefit from Afterpay acquisition?

Hyperion’s belief in buy now/pay later Afterpay has paid off, as the much-maligned stock is to be acquired by Square for US$29 billion ($39.5 billion) – the largest corporate acquisition in Australian history.

It was announced on the Australian Securities Exchange (ASX) on Monday that Afterpay would be acquired by Square, a Silicon Valley digital payment platform launched in 2009 by Twitter founder and chief executive, Jack Dorsey.

“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,” Dorsey said.

“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.”

According to data from the ASX, Afterpay jumped 18.77% to finish the day at $114.80.

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Other BNPL pay later stocks also saw a boost from the news, as LayBuy gained 10.47%, Zip gained 9.04%, Splitit gained 8.7%, IOU gained 7.5%, Openpay gained 3.98% and Sezzle gained 3.74%

Hyperion’s belief rewarded

Afterpay was one of the biggest success stories over the last few years with shares returning over 3,000% since it listed on 29 June, 2017.

According to FE Analytics, the fund with the highest percentage allocated was the Hyperion Australian Growth Companies fund which held an 11.85% weighting.

Jason Orthman, Hyperion deputy chief investment officer, said Afterpay was a misunderstood and undervalued structural growth stock – a view which was validated by the acquisition.

“We estimate that 65% to 70% of those under the age of 30 across Australia, UK and the US do not have a credit card,” Orthman said.

“Further, we estimate over 50 million people do not have a credit rating in the US. This means a large part of the population, particularly Gen Z, are operating out of the traditional financial system.

“High interest rates and revolving debt traps do not appeal to this generation as a result of having observed their parents suffer during the Global Financial Crisis (GFC).

“Apps such as what Square provides and BNPL that Afterpay leads in, have become essential in allowing them to consume and transact outside the traditional finance system.”

Square had also consistently been a top five holding for the fund over the past 12 months and had a current weighting of around 7.5%.

“We believe Square is also a misunderstood stock that Hyperion understands well and is what Afterpay was aspiring to evolve into over the next five years,” Orthman said.

“More recently the BNPL industry has also been validated by the entrance of large players such as PayPal and Apple Pay.

“In contrast, Square offers consumer products across P2P, banking, stocks, bitcoin, and taxes. Square’s product set is broader and significantly more comprehensive when compared with Afterpay’s. The Cash App was launched in 2013.”

Other funds with significant allocations included First Sentier Wholesale Australian Share with 5.29%, Bennelong Kardinia Absolute Return (4.55%), Ausbil Active Sustainable Equity (3.04%), Van Eck MSCI Australian Sustainable Equity ETF (2.82%), CFS MIF Future Leaders (2.47%) and First Sentier Wholesale High Growth (1.48%).

Afterpay had also been added to the ASX 20 on 21 December, 2020, and had been in the ASX 200 for several years, so it was held by the relevant exchange traded funds (ETFs).

The BNPL had been criticised for being overvalued, particularly as it reached a high of $160.05 in February this year, with no competitive moat to block competition which came from the banks, similar up-start companies and PayPal.

It had dropped to under $10 during the COVID-19 pandemic market crash last February-March.

Acquisition to be completed in 2022

The acquisition would be completed by a Scheme Implementation Deed where Square would acquire all issued shares in Afterpay by a court-approved Scheme of Arrangement.

The transaction value was based off the closing price of Square common stock on 30 July, 2021, and would be paid in stock with the transaction expected to be completed in the first quarter of the 2022 calendar year.

Based on Square’s closing price of US$247.26, this represented an implied transaction price of $126.21 per Afterpay share and a premium of 30.6% previous closing price of $96.66 on 30 June, 2021.

Over the last three years to 30 June, 2021, Afterpay returned 566.16%, and since listing on the ASX on 29 June, 2017, it returned 3,480%, according to FE Analytics.

Return of Afterpay since listing on the ASX