The Australian 6 February 2024Talk in the market has resurfaced...

The Australian 6 February 2024

Talk in the market has resurfaced that buy-now-pay-later provider Zip may be in the crosshairs of a suitor, as the company – once hanging in the balance – has surprised on the upside with its turnaround.

Zip has staged a $60m turnaround after it was losing $30m last year and is now making $30m after increasing margins, slashing costs by 20 per cent and staging an exit from over five markets such as the United Kingdom, Middle East and South Africa.

Its convertible notes have now mostly gone, and in the coming weeks it is expected to report some good news on its margins.

Helping Zip, whose share price has more than doubled in the past six months to 79c and its market value at $785m, has been the collapse of smaller competitors and exit from the market by groups like Apple, Goldman Sachs and PayPal.

Its larger rivals are also charging more fees and taking a more rational approach to the business they are taking on.

A Zip spokesman said that the company has not received any takeover approaches, but multiple sources in the market have suggested that there is thought to be at least one group eyeing up the BNPL provider and it is gaining interest around the market from a mergers and acquisitions perspective.

Likely buyers could be larger offshore competitors like Klarna.

The Australian banks may also look.

Separately, there’s talk that Westpac boss Peter King is keen to embark on acquisitions, while ANZ has a handful of prospects it is examining in the event that its plan to buy regional bank Suncorp is blocked due to competition regulator concerns.

Westpac previously held a major stake in Zip.

Market experts say that the top four banks are keen to gain exposure to younger customers in their continuous quest for earnings growth.

CBA had an unpleasant experience with its investment in Klarna, which it wrote down, so would be an unlikely buyer.

Zip, run by former Barclays banker Cynthia Scott and chaired by Diane Smith-Gander, has about $1bn in annual revenue, six million customers and a large cost base.

Unified Capital Partners analyst Jonathon Higgins said that as well as raising fees to merchants in Australia and New Zealand, Zip has moved back towards yield measures in place before the global pandemic.

Its net margins, which is a percentage of total transaction value, has risen to over 3.5 per cent year on year.

Mr Higgins said the US business had re-accelerated and was now growing 35 per cent year on year. Data suggested that BNPL was the fastest growing form of payment in the US, up 30 per cent through cyber sales.

“Zip’s turnaround was way better than anyone expected,” he said.

Zip’s share price topped out at almost $13 in 2021, but the rising interest rate environment hurt the company, which was forced to spend less funding expansion as the market rewarded companies with profitability.

It was subject to a merger with rival Sezzle in 2022, but the deal was called off.