Zip to buy Sezzle in BNPL consolidation deal [ASX:Z1P]
Meta Description: Zip Co Ltd [ASX:Z1P] is about to acquire other BNPL shares Sezzle Inc. [ASX:SZL] in an all-certificate deal valuing Sezzle at $491 million.
First it was Block Inc.it’s [ASX:SQ2] historical acquisition of Afterpay Ltd [ASX:APT].
So it was Humm Group Ltd. [ASX:HUM] sells its BNPL division to Latitude Group Holdings Ltd [ASX:LFS].
And finally, after months of rumored talks, Zip is set to acquire Sezzle.
Consolidation of the crowded – and depressed – BNPL market is underway.
Zip and Sezzle offer: the essentials
- All-stock deal with SZL shareholders entitled to 0.98 Z1P ordinary share for each Sezzle share
- Total consideration for Sezzle shares values Sezzle at approximately $491 million
- The $491 million deal values SZL shares at a 22% premium based on Feb. 25 spot prices and a 31.7% premium based on a volume-weighted average price over 30 days.
- Upon closing of the agreement, Z1P shareholders will own approximately 78% of the combined group, while Sezzle shareholders will own the remaining 22%.
- Zip to undertake fundraising via institutional guaranteed placement to raise approximately $148.7 million
- Zip plans to raise an additional $50 million through an unsecured stock purchase plan
Zip and Sezzle team up: the big questions
Both stocks suffered from deteriorating investor sentiment regarding the once-hyped BNPL sector.
Over the past 12 months, Z1P shares are down 79% and SZL shares are down 81%.
The acquisition therefore raises some questions.
Why does Zip management think they need Sezzle’s assets? And why now?
What can Zip do with Sezzle that he can’t achieve alone?
What is the benefit for existing Zip shareholders, especially when the next capital increases will lead to significant dilution effects?
Did Zip pay a fair price or was the premium too high?
If the name of the BNPL game is volume – increasing total trading volume enough until it reaches a magical critical mass – will adding Sezzle’s network of customers and merchants be enough?
The two BNPL shares summarize the reasons for their merger in the table below:
Zip said the deal is ‘should be accretive to revenue per share and accretive to EBITDA per share in FY24F.‘
Additionally, Zip believes the deal has the ‘potential to realize significant cost synergies and opportunities to increase revenue and margins with EBITDA benefits of up to $130 million EBITDA in FY24.‘
So there is the potential of financial benefits…in the distant FY24.
Is this enough to sway investors who have become increasingly skeptical of the industry?
And will the “cost synergies” be sufficient for a company known for its high consumption of cash?
In a timely reminder of the expensive nature of buy now, pay later, Zip added another announcement to its acquisition update… its H1 FY22 results.
While Zip saw record transaction volume of $4.5 billion (up 93%), the revenue margin was a modest 6.7%… with interest rates (and an increase in the cost of capital) imminent.
While revenue increased during the period to $301.3 million, bad debts and expected credit losses also increased.
Bad debts and expected credit losses increased from $29.5 million to $148.3 million.
In other words, bad debt accounted for 49% of Zip’s operating revenue in the last six months.
Zip ended the semester with a net loss of $214.3 million.
During the period, Zip also reported:
‘Cash trading margin declined to 2.1% (vs. 3.7% in H1 2021), reflecting higher bad debt costs reflecting current credit headwinds as well as an increased weighting in favor from the rest of the world.‘
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