Zip further push into the US with the acquisition of Sezzle

On Monday 28th February, US-based payments technology firm Sezzle was acquired by Zip, an Australian financial technology firm. The deal values Sezzle at 355 million USD, which represents a 22% premium compared to the Australian Securities Exchange (ASX) listed shares previous to the announcement. The transaction has been approved unanimously by the boards of the respective companies, and the transaction is expected to be completed in the third quarter of this year.

Both Zip and Sezzle offer “Buy Now Pay Later” (BNPL) services to consumers purchasing goods online. These businesses provide a service that allows consumers to purchase goods and pay for them at a later date. The BNPL business then collects commissions from the retailer for their contribution to the sale. Zip currently has around 81,000 retail partners and over 9 million customers. Sezzle caters for 7.8 million customers across 40,000 participating merchants. Zip operates worldwide in countries such as Australia, Canada, the Czech Republic, UK and USA, while Sezzle only offers its services in the USA. This means that the acquisition will help Zip to continue to develop and consolidate its customer base in the US market for BNPL services. According to the Financial Times, the combined business will have a customer base of roughly 13 million and 120,000 retail partners, including Microsoft, Amazon and Facebook.

The US market has significant potential in terms of growth, where BNPL payments only account for roughly 2 per cent of transactions, which is significantly lower than other markets, such as Australia. Zip expects the acquisition to increase the company’s share of revenues earned in the US from 48% to 60%. Zip’s customer offering is deemed to be more advanced than that of Sezzle, but Sezzle possesses stronger relationships with merchants. It has existing relationships with multiple large businesses that Zip is uninvolved in, such as Ikea, Target and Spotify. The transaction will allow Zip to combine these offerings and increase growth.

Co-founder of Zip Larry Diamond stated that buy now, pay later is expected to see the strongest growth of any payment method in the US from this low base of two per cent. This is not the first international interest in Australia’s BNPL innovation. Last year, Square, a US-based financial services and digital payments company, completed a 39 billion AUD acquisition of Afterpay, an Australian BNPL firm. However, despite this interest, investors have become concerned in recent months about the level of cash burn and debt risk in the businesses in this sector as interest rates are now expected to rise. This has caused a large hit to the share price of Zip, which is down 80% compared to last year, and other comparable businesses. However, despite these struggles, Diamond said that Zip would be both cash flow and earnings positive by the end of 2024. This would be aided by cost synergies achieved by the consolidation of the two businesses.

Analysts at Citi stated in a client note that “While we see the acquisition of Sezzle as positive in terms of reducing the cost base, we expect the focus to be on delivering the revenue strategies.” Zip, despite its intentions of strong growth, remains hesitant about making acquisitions in some regions, such as the UK. Peter Gray, another co-founder of Zip, said “We are committed to our global expansion but are taking a more disciplined approach”, and also stated that “The UK remains further away than we’re comfortable with to continue to invest at the same rate”. This may be due to an increase in concern from regulators over the BNPL market. In October last year, the UK government launched a review of the BNPL market, expressing concerns about risks to customers. As Zip enters the US market during a period of economic uncertainty, investor concern over the risk of bad debt held by Zip will not be mitigated by continued expansion into the US.

This transaction will allow Zip to increase its market share in the US, helping it to achieve targets for revenue. This will both please investors and demonstrate the business’s ability to generate strong, sustainable revenue growth. However, issues such as credit risk during economic uncertainty will continue to exist, and may even develop during further expansion, so Zip will have to focus on this while attempting to meet financial targets.

By Archie MacKechnie

Sector Head: Hortense Comon

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