Zip will buy Sezzle, as buy now, pay later consolidation continues

Zip Co has entered into a “definitive agreement” to acquire Sezzle in an all-scrip deal, and will raise $200 million via a placement and share purchase plan to drive growth on the back of the acquisition of the United States buy now, pay later provider as the industry races to get to scale.

Zip said the deal valued Sezzle at $491 million, a 22 per cent premium accounting for the spot prices of the companies ASX-listed shares. Zip said the deal had been unanimously approved by both companies’ boards of directors.

“With Sezzle, we are doubling down in the US, and believe we have what it takes to win in that key market,” Zip co-founder Larry Diamond told investors on a call.

The combined business would have 13 million customers, 125,000 merchants, and have around 60 per cent of sales volume in the US.

The $150 million placement and accompanying $50 million share purchase plan was first reported on Sunday evening. Street Talk reported on Monday morning the shares will be placed for $1.90 each, a 14 per cent discount to the last close.

“Proceeds of the placement and SPP will help Zip strengthen its balance sheet and positions Zip for sustainable growth by providing more capital runway to execute on the potential synergies from the proposed transaction,” Zip said.

Zip shares, one of the most highly traded stocks on the ASX among retail investors, entered a trading halt on Monday morning ahead of the deal being announced with its interim results. Sezzle also entered a trading halt before the market opened after jumping 14 per cent on Friday.

Zip said the merger with Sezzle would take place under the laws of the US state of Delaware. When completed, Zip shareholders would own around 78 per cent of the combined group while Sezzle shareholders would own the remaining 22 per cent.

Zip, last week, pre-reported a cash EBTDA loss for the first-half of $108 million, much deeper than analysts had expected. It’s adjusted loss before tax was $153.6 million.

It also revealed net bad debts had risen to 2.6 per cent of sales, an increase of 132 basis points on 2021 levels. Bad debts plus expected credit losses rose 402 per cent to $148.3 million, representing 3.3 per cent of sales.

Marketing expenses rose by 182 per cent to $74.5 million.

Strong transaction growth continues: Zip reported record sales volumes of $4.5 billion through its platform over the first half, up 93 per cent and around half the value that is going through Afterpay.

Zip said revenue is also at record levels, up 89 per cent at $302 million for the half. Total customers hit 9.9 million, up 74 per cent; while merchant numbers grew 113 per cent to 81,800.

Nevertheless, it will look to reduce costs and focus on “driving sustainable growth and increased profitability in core markets”.

The focus on creating a path to profitability comes as Zip’s share price suffers a horror run falling 30 per cent in the past month as investors worry about deteriorating unit economics, although it rose sharply at the end of last week.

The tough first half comes after Zip reported a $653 million loss for the full 2021 year in August, drawing attention to surging costs to fund international expansion. That result also highlighted rising bad debts, with net bad debts written off jumping to $74.5 million from $28 million. The statutory loss included a readjustment to the cost of its acquisition of Quadpay to account for its falling share price along with equity payments to staff.

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