Surprise Zip update points to acquisition deal with Sezzle

A surprise earnings update by Zip pointing to larger-than-expected cash losses for the half raised speculation the buy now, pay later provider will soon unveil the acquisition of Sezzle, whose stock has also been struggling.

Zip said on Monday it “continues to be in discussions with Sezzle in relation to a potential acquisition”, after the two companies confirmed in late January they were talking about a possible tie-up.

This comes amid a wave of consolidation in the buy now, pay later sector, which has seen Block buy Afterpay, and Latitude take over Humm.

Zip said on Monday its cash earnings, bad debts and operating costs were worse than the market was expecting for the first half.

Zip, due to report half-year results on Thursday, said it is not certain discussions with Sezzle, which operates in the US, would lead to a deal. Sezzle shares were trading 4.5 per cent lower on Monday morning.

But one analyst suggested Zip’s update could be a pre-cursor to the deal being announced, potentially with the interim results.

“This is unexpected prior to results on Thursday, and perhaps may be a cleansing statement for the market ahead of a potential acquisition/merger with Sezzle,” said Jonathon Higgins, senior analyst at Shaw and Partners and long-time watcher of Zip.

“The potential addition of Sezzle is likely to drive material cost savings and increased scale with the potential to be the number three player. However, the industry now appears to require consolidation of smaller players, rather than driving consolidation as a result of multiple benefits.”

Zip said it remains confident about the outlook despite its cash EBTDA plunging to a loss of $108.1 million for the first half, much higher than consensus expectations for a $40 million loss. Zip said this was due to “investment in growth, geographic expansion and the pathway to becoming a global company”.

The higher loss came on the back of cash operating costs in the first half surging by around $60 million to $204.5 million, reflecting the costs of new engineering staff, marketing and its global re-brand. This figure is also worse than market expectations.

Bad debts also missed expectations. Zip said net bad debts of 2.6 per cent of transaction volumes reflected the “change in the external environment in the US…with the easing of government stimulus”.

“The group has already adjusted its risk settings to drive down future losses,” Zip said.

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