Zip Co and Sezzle merger comes undone

The proposed merger of buy-now pay-later (BNPL) firms Zip Co (ASX: ZIP) and Sezzle (ASX: SZL) has been terminated, with the two blaming market conditions for the deal’s demise.

Announced today, the BNPL competitors have mutually agreed to no longer pursue the scrip-based merger, which valued Zip’s US rival Sezzle at $491 million at the time. However, the implied value would be drastically lower now given Zip's share price has fallen by three quarters since then.

As part of the termination, Sezzle will receive US$11 million (AUD$16.3 million) to cover legal, accounting and other costs associated with the transaction.

“We believe that mutually terminating the merger agreement with Sezzle at this time is in the best interests of Zip and its shareholders, and will allow Zip to focus on its strategy and core business in the current environment,” says Zip chair Diane Smith-Gander.

As part of a short ASX statement, Zip says it remains 'firmly focused on its strategic plan and accelerating its path to profitability' and still considers the US a ‘core market’ despite dumping the merger today.

“Zip is well capitalised to execute on its strategy and, in line with previous guidance, Zip continues to expect to deliver group profitability during FY24,” says Zip.

Since the merger was announced in late-February, the company’s share price has tanked from about $2 per share to just 50 cents as of the close of trade yesterday.

This represents a significant drop in value for Zip, once a darling of the ASX, which had a market capitalisation of about $1.1 billion earlier this year. Today it is valued at around $281 million, representing a dive of approximately $843 million.

“While we were excited by the potential of this transaction, our board and management team are laser-focused on our strategy and execution,” says Sezzle co-founder, executive chairman, and CEO Charlie Youakim.

“We remain dedicated to driving toward profitability and free cash flow and believe this is the best outcome for our shareholders.”

The deal would have seen Zip shareholders own 78 per cent of the combined group, and was unanimously backed by the board of directors of both companies back in February.

At the time, Zip was excited by the expansion potential of the transaction, with the merged entity to have had 8.8 million customers and 60,500 merchants in the US.

The announcement comes just days after Zip announced it was closing its money management app Pocketbook in the face of ‘significant changes’ to the company’s operating environment.

However, the fintech says it is hoping to introduce a similar product for its customers through its own corporate-branded app over the next year.

These developments come as the BNPL sector as a whole faces challenging market conditions due to rising interest rates and an increase in bad debts - the latter of which increased outside of Zip's target range during the period ending 31 March.

Zip saw an 89 per cent increase in revenue through acquisition in the first half of FY22, although it still posted loss of $172.79 million. This was down from a $455.93 million loss a year earlier.

However, total cash on hand fell 19 per cent to $266.8 million for the six months to the end of December and the closure of Pocketbook is seen as part of a range of cash-preserving measures implemented by the parent company as its focus turns from expansion to belt tightening.