Business Context and Reporting Period
This Form 8-K, filed on October 27, 2021, by Square, Inc. (now Block, Inc.), addresses Item 8.01 (Other Events) regarding the proposed acquisition of Afterpay Limited. The filing serves as a supplemental disclosure to the Definitive Proxy Statement filed on October 5, 2021, in response to eight shareholder lawsuits and two demand letters alleging insufficient disclosure regarding the transaction's valuation and board deliberations.
Key Financial Metrics and Transaction Details
The filing provides specific inputs used by financial advisor Morgan Stanley for valuation analyses as of July 30, 2021:
- Afterpay Net Debt: $353 million (historical).
- Square Net Debt: $(4,344) million (historical, indicating net cash position).
- Afterpay Fully Diluted Shares: Approximately 290.1 million ordinary shares plus 11.1 million shares from subsidiary instruments.
- Square Fully Diluted Shares: Approximately 459.7 million common shares plus options and RSUs.
- Advisory Fees: Square agreed to pay Morgan Stanley approximately $30 million ($25 million upon closing, $5 million upon announcement) plus a discretionary fee of up to $15 million.
- Valuation Multiples (CY 2022E/2023E):
- Afterpay AV/Gross Profit: 23.6x / 18.1x
- Square AV/Gross Profit: 22.4x / 17.6x
- Afterpay AV/SS EBITDA: 44.8x / 34.5x
- Square AV/SS EBITDA: 52.4x / 41.6x
Material Changes and Supplemental Disclosures
The filing details specific additions to the proxy statement to address litigation concerns:
- Board Deliberations: Disclosed that on May 17-18, 2021, Square executives met with Afterpay leadership to discuss visions and integration challenges. It clarified that no specific post-closing employment or compensation details were discussed at that time.
- Valuation Methodology: Provided detailed ranges for implied share values based on discounted equity value and discounted cash flow analyses.
- Afterpay Implied Value (A$): Ranged from A$85 to A$452 depending on projections (Standalone vs. Synergies) and discount rates (9% vs. 15% hurdle).
- Square Implied Value ($): Ranged from $204 to $354 based on consensus projections and discount rates.
- Precedent Transactions: Disclosed median acquisition premia for comparable transactions: 22% (U.S.), 26% (Australia), and 7% (International) relative to spot prices.
- Analyst Price Targets: Median discounted price targets were A$138 for Afterpay and $252 for Square.
Outlook, Risks, and Contingencies
Litigation Resolution: Following the supplemental disclosures, plaintiffs in the eight lawsuits agreed to voluntarily dismiss their actions with prejudice, and demand letter senders agreed not to file complaints. Square maintains the claims were without merit and denies any admission of liability.
Transaction Risks: The filing reiterates standard forward-looking statement risks, including the possibility of governmental prohibition, delays in regulatory approvals, and the failure to satisfy closing conditions. It also notes that Morgan Stanley holds approximately 6.3% of Square's Class A common stock and is a lender to Square, though it has not received fees from Afterpay in the prior two years.
Investor Verification Checklist
- Verify the final transaction price per share against the implied value ranges disclosed (A$85–A$452 for Afterpay; $204–$354 for Square).
- Confirm the status of the special meeting of stockholders scheduled for November 3, 2021.
- Review the full Definitive Proxy Statement for the complete list of comparable companies (Shopify, Affirm) and the specific synergy assumptions used in the valuation.
- Monitor regulatory filings for any updates on the Australian Securities and Investments Commission (ASIC) no-objection statement.
- Assess the impact of the $30 million+ advisory fee on Square's near-term cash flow and expenses.