The Touchcorp Ltd (ASX: TCH) share price has gone gangbusters today after the payments solution company announced its plan to merge with fast-growing payments company Afterpay Holdings Ltd (ASX: AFY).
At the time of writing the Touchcorp share price is up 36% to $1.43. The Afterpay share price is down slightly to $2.40.
According to an announcement this morning the two companies have signed a heads of agreement relating to an in principle agreement for a proposed merger under a newly incorporated Australian holding company.
Both companies believe a merger would deliver significant benefits to both sets of shareholders, as well as enhance the attractiveness of its combined customer proposition.
Key terms of the merger include:
- A newly incorporated Australian company (NewCo) will issue new shares to Afterpay shareholders (excluding Touchcorp, which currently holds approximately 26% of Afterpay shares on issue on a fully diluted basis) on a 1:1 basis. Touchcorp shareholders will be issued new shares on a 0.64:1 basis.
- At completion NewCo will be 64%-owned by Afterpay shareholders (excluding Touchcorp) and approximately 36%-owned by Touchcorp shareholders.
- NewCo will be listed on the Australian Securities Exchange.
- Afterpay's Anthony Eisen will be the Executive Chairman and Nick Molnar will be Chief Executive Officer.
The two parties have now entered into a 4-week period of exclusivity, during which due diligence will be conducted. Management has warned however that there is no guarantee that a merger will complete.
Should you invest?
I believe the merger does make a lot of sense. As well as the expected benefits of scale with input cost synergies and process efficiencies, management believes the revenue growth opportunities that Afterpay's extensive retail network provides Touchcorp could prove to be invaluable.
At the last count the number of integrated retail merchant clients using Afterpay's service had reached 2,600 and was growing fast. These retailers include the likes of Super Retail Group Ltd (ASX: SUL), Optus, Cotton On, and General Pants Co.
Whilst I think overall the proposed merger could prove to be a success, I wouldn't necessarily recommend rushing into an investment. The Afterpay business has been growing like wildfire in the last 12 months, whereas the Touchcorp business has been a huge disappointment.
If Touchcorp isn't able to successfully leverage Afterpay's network, then it may ultimately act as a drag on Afterpay's explosive growth. Because of this I would suggest investors leave the pair on their watch list for now and keep an eye on their progress.
