AFR artical by Anthony Macdonald and Yolanda Redrup from late yesterday below - on topic regarding arbritrage opportunity for those interested.
Fast money floods into Afterpay; new pairs trade alive and kicking
Introducing the new capital markets game in town.
The fast money offshore is coming for Australia’s Afterpay, snapping up shares from domestic fund managers and matching it with a short position in suitor Square, which is listed in the United States.
The trades streamed in on both Monday and Tuesday - days when more than $1 billion of Afterpay stock changed hands, or about 15 per cent of the value of all shares traded on both days. Traders said not much else was getting a look in on equity desks.
Stockbrokers reckon it will continue all week, and likely get to the point where hedge funds will quickly own 10 per cent of Afterpay’s register. The spread between Afterpay’s share price and the implied valuation of its offer is about 7 per cent. If you assume the deal takes six months to complete (and also assume it will actually complete), then it’s a 14 per cent annualised return.
The fast money funds can trade out in the meantime or, if everything goes swimmingly, wait until their Afterpay stock is swapped for Square shares. At that stage, they will take Square’s US-listed Class A shares for their Afterpay shares, and close out their Square short position.
In the meantime, local investors are keen to swap their Afterpay shares for cash, knowing the way that the stock trades they’ll likely have a chance to buy back in later or just say goodbye to what has been a wild ride. They’re viewing the transaction as a stock swap as much as a takeover; swap your shares in Afterpay for shares in Square.
There’s also a bit of caution around how Square’s ASX-listed CDIs would trade, following similar deals from Unibail-Rodamco-Westfield and Iron Mountain which were underwhelming. (Even Amcor, which swapped its primary listing to the US when it acquired Bemis in 2019, has lost a bit of its presence in local investors’ minds).
So Afterpay is once again proving to be a boon for the big institutional equities desks. UBS, Morgan Stanley and Merrill Lynch topped Afterpay market share on Monday and Tuesday, ahead of Credit Suisse and Goldman Sachs. Together the five brokers had about 60 per cent of Afterpay trade on Tuesday.
In terms of Afterpay blocks - the highly sought after trades worth more than $10 million - Goldman Sachs, Merrill, UBS and Morgan Stanley all got a piece of the action. The biggest line went to Goldman Sachs; a parcel of 199,115 shares worth $25.6 million.
SQ was up 10% overnight in the US so APT should be up 10% today. From here on in we should see APT share price track SQ and the discount to the buy price should close.
Normally a stock trades below a take over price, the discount made up of a probability that the deal wont go ahead and a time value discount. In the case of SQ buying APT, because it is an all script offer (ie paid for in shares) and you would expect SQ's share price to go up over time, there shouldn't be a time value discount and the deal looks to be locked in so I don't see a reason for a probability discount.
In short, the APT share price should equal the 0.375 x SQ share price divided by the current FX rate... Anything less is an arbitrage opportunity.
As mentioned before, I already have a lot of APT so adding more for a 5-10% arbitrage doesn't appeal.
Firstly, bravo to the co-CEO's, well played you Good Sir(s)!
Excerpt: Square has agreed to establish a secondary listing on the Australian Securities Exchange (ASX) to allow Afterpay shareholders to trade Square shares via CHESS Depositary
Interests (CDIs) on the ASX. Afterpay shareholders will be able to elect whether to receive the Consideration in NYSE listed Square Class A common stock or CDIs. The CDIs listed on the ASX are expected to be eligible for S&P index inclusion in Australia.
My question is this: What considerations are there between these two choices - owning CDI's on the ASX (and topping up as appropriate) and holding shares directly on the NYSE? I understand either way, from Aus, I am only a "beneficial owner". So what I am missing in my choice considerations?