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 Blockbuy Afterpay, and Latitude take over Humm.

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, 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 engineering staff, marketing and its global re-brand. This figure is also worse than market expectations.

Zip share were down 4 per cent in the first hour on Monday to $2.47 having started the calendar year at $4.33. Zip’s stock is down by 80 per cent in the past 12 months, while Sezzle is down 85 per cent, as investor sentiment turned ugly against the BNPL sector over the second half of calendar 2021.

However, Zip said revenue had reached a record $302.2 million, up 89 per cent, while it reported record transaction volume of $4.5 billion for the half, up 93 per cent.

If Zip bought Sezzle, Shaw and Partners said the deal would likely be mainly scrip-based and would create the number three buy now, pay later player in the United States with more customers than Affirm, whose shares are down 65 per cent in the last year.

Zip said on Monday its board, now chaired by Diane Smith-Gander, “remains committed to ensuring any transaction delivers value to shareholders and will always be disciplined in its assessment of potential opportunities”.

“The board pursues transformational transactions that help accelerate the delivery of Zip’s broader strategic objectives of greater scale in core markets, improved customer and merchant value, and a faster path to profitability through significant synergies,” it said.