Zip to stump-up a 22% premium to acquire BNPL rival, Sezzle 

Zip (ASX: Z1P) has turned its January preliminary discussions with Sezzle (ASX: SZL) into reality, marking yet another consolidation between major BNPL players.

Transaction in a nutshell 

• All-scrip transaction (think Block and Afterpay)

• Sezzle shareholders will receive 0.98 Zip shares for each Sezzle stock they own on the record date

• Transaction valued at $491m or a 22% premium to Sezzle's current market value (based on Zip's close on 25 February)

• Zip to own circa 78% of the combined Group, Sezzle shareholders to own the remaining 22%

• Transaction expected to be complete by third quarter of calendar year 2022

Capital raising 

In conjunction with the acquisition, Zip announced a $148.7m capital raising to prop up its balance sheet. 

The placement is at a fixed price of $1.90, representing a 14% discount to Zip’s last closing price on Friday, 25 February of $2.21.

Transaction rationale

Zip expects the acquisition to deliver "the scale to support sustainable growth and the path to profitability." This includes aspects such as: 

• Accelerate US growth: the combined group will have 8.8m customers and 60,500 merchants in the US compared to Zip's standalone figures of 5.7m and 18,000 respectively

• Enhance product suite: Zip can tap into Sezzle's longer duration BNPL services and small-to-medium business enterprise offering

• Drive customer engagement: Zip has higher engagement and unit economics versus Sezzle, which has a low cost consumer acquisition channel

• Cost synergies: Reduction in employees, duplicative roles and administrative costs to save circa $60-80m by FY24

• Transaction synergies: Access to new merchants with larger customer base plus funding and processing cost efficiencies to save circa $40-50m by FY24

Does the acquisition make sense? 

BNPL shareholders have gone through hell, with most ASX-listed names down -80% from 52-week highs. 

The theme of consolidation has already begun following Block's acquisition of Afterpay, and Latitude (ASX: LFS) buying out Humm's (ASX: HUM) BNPL business.

Macquarie called out the theme of industry consolidation in a March 2021 report, expecting a scenario where "the strong become stronger and the weak get weaker".

"We expect the BNPL sector to go through a phase of consolidation, and with no differentiated product the most important consideration will be being able to “weather the storm”.

"This could lead to the weaker companies either fading out or if synergies exist, being acquired by the stronger BNPL(s) as a bolt-on acquisition," the report said.

The basis of consolidation was to enhance scale, competitive advantages and consolidation synergies.

It appears the Sezzle acquisition is trying to achieve is that.

The combined Group is expected to have a global customer base of 13.3m - going toe-to-toe against Affirm and Afterpay, which have 11.2m and 16.2m customers respectively.