Afterpay deal opens up a whole new world for investors


The idea behind the takeover of Afterpay – with the support of its co-founders Nick Molnar and Anthony Eisen – is that Australian fintech will act as a bridge between Block’s Cash app and its Seller app.


Afterpay will have access to Block’s many merchants and consumers in the critical US market, and Block will get Afterpay’s buy now, pay later, and online shopping platforms. Supporters believe the company’s long-term potential is to be a “super app” on par with WeChat in China.

The merger is entirely script-based, meaning that existing Afterpay shareholders can choose to be paid in US-listed Block shares, or they can own the shares via dual listing on the ASX. The final hurdle that the deal has yet to overcome is the approval of the Bank of Spain, which is expected in early 2022.

Among the institutional investors approached by The Sydney Morning Herald and Age, there was broad support to bring the two companies together. Yet few investors had yet made up their minds to invest in Block, suggesting that the stock could be as controversial as Afterpay has been.

Ophir Asset Management portfolio manager Steven Ng, a long-time shareholder of Afterpay, has said the fund is willing to keep its stake in Block, assuming the takeover continues. He says the merger is expected to accelerate the growth of Block and Afterpay’s businesses.

“From Block’s perspective, it looks like Afterpay could act as the glue that binds the Cash and Seller ecosystems together,” says Ng. “I think it speeds up both Block’s and Afterpay’s strategy.”

Holon Global Investments investment analyst Todd O’Dea said the merger is expected to support the growth of Afterpay at a time of fierce competition within BNPL, but the fund has not determined whether it will invest. in Block.

“We will likely see a lot of consolidations over the next two years in this BNPL market. Being able to partner with Block and have access to 70 million cash app users will be very profitable, ”said O’Dea.

Payments are the part of the bank that suffers the most disruption from fintechs, and some see this as another attractive trait of Block.

Jun Bei Lui, who manages around $ 1 billion at Tribeca Investment Partners, likes the payments business owned by Block and believes the merger can fuel Afterpay’s access to the capital and scale it needs. Despite this, she sold her position in Afterpay so that it was in line with the company’s weighting. “It’s mainly because it’s a very different business now,” says Liu.

Block’s exposure to cryptocurrencies is a concern for some investors.Credit:Moe Zoyari / Bloomberg

Crypto volatility

Block’s exposure to cryptocurrency is one of Liu’s main concerns – and many others. In its latest quarterly results, bitcoin trading revenue was $ 1.8 billion ($ 2.5 billion), a third lower than the June quarter, largely in response to the digital asset price volatility. For some investors, such wild fluctuations are a drag.

While Liu says cryptocurrency trading will eventually find its way, she says it’s difficult to assess a cryptocurrency trading business, and at the moment, she isn’t convinced that the trade-off. risk-reward makes sense to its investors.

“The challenge is that cryptocurrencies are such a volatile space. The volatility of cryptocurrencies is five times that of the stock market, ”said Liu.

White Funds Management chief executive Angus Gluskie said crypto risks would be a key issue for an ASX investor to consider if they consider Block stocks, alongside their international exposure. “We haven’t made our decision, but it’s clearly exposed in high-risk areas,” he said. “My personal feeling is that cryptocurrencies have an endless supply and ultimately no value. So it’s a pretty dangerous space to be in.

Yet, as crypto assets become more mainstream, with the Commonwealth Bank poised to offer bitcoin trading, there are many in the market who are comfortable with some crypto exposure.

Nick Healy, portfolio manager of Wilson Asset Management’s global equity fund, says Block’s exposure to the volatile bitcoin market is something potential investors should be aware of – but it wouldn’t necessarily dampen interest in the market. market for action.

“I wouldn’t say volatility would be a reason to rule it out, but it would definitely be something you would want to be aware of getting into,” he says. “Jack Dorsey has clearly expressed his interest in cryptocurrencies.”

Holon’s O’Dea also doesn’t view Block’s bitcoin exposure as a problem, saying it’s a way to gain exposure to cryptocurrency assets. “On the contrary, it might be good to have a little more innovation on the ASX and a little more diversification away from banks and miners,” O’Dea said.

Ophir’s Ng also said he was not worried about the company’s bitcoin revenue. “It just makes the revenue look more volatile – but for us it’s the gross margin that’s important,” he says.

“My personal feeling is that cryptocurrencies have an endless supply and ultimately no value. So it’s a pretty dangerous space.

Angus Gluskie, White Fund Management

Additionally, Ng says Block’s decision to offer bitcoin trading to customers is an example of the company’s drive to innovate.

Like all “growth” stocks, including Afterpay, Block’s stocks also went on a roller coaster ride, dropping from more than six times their COVID-19 low to $ 247.26 when the deal with Afterpay went down. was announced in August. Since then, however, they have fallen by more than 30 percent.

Much like Afterpay, the company has never paid a dividend and does not plan to pay any in the foreseeable future because it is focused on growth.

American center of gravity

A final issue facing potential Block investors is geography. Despite being dual-listed, the company is US-focused, and local investors will have much less access to management than with Afterpay. Block has a market cap of over $ 80 billion, but the weighting of ASX-listed Block stocks in the local market is uncertain.

Opal Capital Management portfolio manager Omkar Joshi predicts that local interest in ASX-listed Block stocks will wane over time, as has happened with Westfield owner Unibail-Rodamco , which is double listed in Australia.

“At the end of the day, Block is an American company. Investors in Australia aren’t really going to spend a lot of time there, ”says Joshi, who does not currently own Afterpay shares.

Despite this, there are examples of ASX-listed companies with a strong local audience that focus on the United States, such as California-based medical device company ResMed.

Whether or not Australian investors choose to adopt Block, its size, innovative flair, and potential to disrupt the banking industry can make it hard to ignore.


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