When Block (NYSE: SQ) made a takeover approach for ASX-listed buy-now pay-later juggernaut Afterpay (ASX: APT), it was one of the biggest transactions in the mergers and acquisitions space in 2021.
At the time of the bid, the transaction was valued at around $39 billion, however, a broad-based sell-off across the tech sector over recent months has pared that value quite significantly, with shares in Block falling from US$272 to around US$128 a piece. The all-scrip deal is now worth around $20 billion.
After a long wait, and a number of hurdles, the transaction was given the all-clear a little over a week ago when the Bank of Spain gave the green light – a condition precipitated by the fact that Afterpay’s UK subsidiary, Clearpay, acquired Spanish payments business Pagantis in 2020.
Who is Block?
If you are unfamiliar with Block, then you may have heard of its previous branding, when it was formerly known as Square. Co-founded in 2009 by Jack Dorsey, who until late 2021 was in charge of Twitter (NYSE: TWTR), Block is a financial payments business allowing smartphone users including SMEs to process credit card payments via its range of compact terminals.
Overseas, Block also boasts a consumer app called Cash App, which hosts 70 million users and allows individuals to transfer money, as well as trade digital assets like cryptocurrency and shares. The company is also building a bitcoin mining system, and with over 8000 Bitcoin on its books, plus plans to mine the digital currency, it will be the ASX’s first cryptocurrency stock.
Block’s decision to buy Afterpay is part of its broader move to expand and build scale by cross-selling its services, with Afterpay set to gain access to Block’s merchant and consumer customers, and the BNPL platform set to become an integral part of Block’s ecommerce offer. Afterpay’s co-founders and co-CEOs Anthony Eisen and Nick Molnar will join Block and help drive merchant and consumer growth.
What happens to Afterpay shares?
Trading in Afterpay shares was suspended at the close of business on January 19, 2022, under Listing Rule 17.2. That follows lodgement of the Supreme Court of New South Wales orders with ASIC approving the Scheme of Arrangement where Block will acquire all of the issued shares in Afterpay.
The stock will cease to be admitted to the official list of the ASX on the trading day following the implementation of the Scheme, which is expected to be Tuesday, February 1, 2022. That means the ‘APT’ ticker is expected to be removed from the ASX on Wednesday, February 2, 2022.
Afterpay shareholders were able to elect to receive the scheme consideration of 0.375 shares in Block for every 1 share in Afterpay as either direct shares in ‘SQ’ listed on the NYSE, or as ASX-listed Chess Depositary Interests (CDIs) trading under the ticker ‘SQ2’.
What are CDIs?
Chess Depositary Interests (CDIs) are one way in which Australian investors can obtain all the economic benefits of owning securities in a foreign-listed company, including dividends, however, they do not actually hold a legal title to the shares. Sometimes this means shareholders do not have a vote at shareholder meetings, although instructions may typically be passed on to the CHESS Depositary Nominees, which is an ASX subsidiary.
The reason behind CDIs is due to the ownership differences between local and overseas markets. In Australia, the CHESS system ensures investors own shares directly in their own name. In the US, shares are registered with third-party custodians.
As a result, CDIs are designed to ‘marry’ the two systems and provide local investors a way to trade a stock like Block via the ASX, and in a manner that is recognised by US regulatory authorities. Prices for the two securities typically trade in line, adjusting for forex. CDIs may be converted into direct US-listed shares, albeit this process is quite administrative.
Is Block on the ASX?
One of the conditions to the Block-Afterpay Scheme Implementation Deed was that Block would create a secondary listing on the ASX so that local investors can invest and trade in the larger entity. The dual-listing allows Afterpay shareholders to trade Block shares via CDIs on the ASX, under the ticker ‘SQ2’.
The ASX has dubbed this one of the most-important listings in the history of the local market, with the market operator believing it could pave the way for other large tech names to list down under in the future.
After more than six months, and with the transaction now signed-off, that paves the way for shares in Block to list on the ASX on January 20, 2022, at 11am Sydney-time. Upon listing, Block is set to be one of the biggest companies on the ASX, however, its primary listing will remain on the New York Stock Exchange.
The CDIs will trade on a deferred settlement basis until close of trading on February 1, 2022. From February 2, 2022, new Block shares on the NYSE will commence trading, while the ASX-listed CDIs will begin trading on a normal settlement basis.
What will trading volume be like in Block CDIs?
This is one of the unknown equations at this stage given Afterpay shareholders had the choice to convert their APT shares to either ASX-listed CDIs (SQ2) or US-listed shares (SQ). Some holders, including institutions, will have opted for the overseas stock, however, the vast majority appear to have converted their shares into CDIs. A higher share price post-conversion is something that shareholders will also have to be mindful of when comparing like-for-like purchases in terms of value, while deferred settlement periods typically see ‘lighter’ trading volumes.
According to the ASX, 96,077,093 fully paid shares of Class A common stock will be quoted and settled in the form of CDIs, with the shares and CDIs quoted at a ratio of 1:1. In total, Block’s capital structure includes around 400 million Class A shares, plus approximately 60 million Class B shares, among other securities.
Not all ASX ETFs will include Block in their index and holdings due to their own trading rules and restrictions around CDIs, foreign-domiciled companies and the revenue they generate in Australia.
In past instances, CDIs have seen mixed fortunes following similar transactions. ResMed (ASX: RMD) is one CDI that still sees significant trading volumes through the ASX. On the other hand, Unibail-Rodamco-Westfield (ASX: URW) is an example of a CDI where liquidity dried up after it completed a dual-listing in the wake of its Westfield acquisition.
Nonetheless, as a tech addition, names don’t get much bigger than this for the ASX.
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