Square up 10%. What does this mean for the Afterpay (ASX:APT) share price?

Why surging Square shares could spell good news for the Afterpay share price.

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The Afterpay Ltd (ASX: APT) share price will be in focus again today following the jump in Square Inc (NYSE: SQ) shares overnight. This came following the big news yesterday that the buy now, pay later giant has received a $39 billion takeover proposal from Square.

Why Square could impact the Afterpay share price today

Square values Afterpay at approximately US$29 billion, however, it is expected to be paid entirely in Square Class A common stock.

Square also noted that it may elect to pay 1% of the total consideration in cash.

Under the terms of the takeover, Afterpay shareholders will receive a fixed exchange ratio of 0.375 Square shares for each Afterpay share they hold on the record date.

The reference price used in the takeover announcement was US$247.26, Square’s last closing price on Friday 30 July.

But the transaction is not yet finalised, and the Square share price could wind up being materially different to the US$247.26 reference price used in the takeover announcement.

Square surges overnight

The Square share price surged 10.16% on Monday night to US$272.38.

Under the fixed exchange ratio of 0.375, this would represent around US$102 worth of Square stock.

Converting this figure back into Australian dollars at the current exchange rate, this would, theoretically, value the Afterpay share price within the $130 to $140 range. Of course, whether this translates to the actual share price remains to be seen.

What else should investors know?

Investors should note that the transaction is still subject to a number of conditions.

These include regulatory approvals as well as approval from both Square and Afterpay shareholders.

Square will also need approval for the quotation of new securities on the New York Stock Exchange and its planned CHESS Depositary Interest (CDIs) on the ASX.

In addition, Afterpay will seek a receipt of confirmation from the Australian Taxation Office for the availability of scrip-for-scrip capital gains tax rollover relief, ensuring the transaction can be made on a tax-free basis for Afterpay shareholders in Australia.

While both companies will be busy with getting their approvals and paperwork in order, the bottom line is that the Afterpay share price will, again, be ‘squarely’ in the spotlight on Tuesday.

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO and Square. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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