Zip Co Ltd (ASX: Z1P) will merge with Sezzle Inc (ASX: SZL) for $491 million after agreeing to join forces as the buy-now-pay-later (BNPL) land grab heats up.
The combined business will have 13.3 million customers and over 128,000 merchants, with a particular focus on the United States.
Zip will also raise $200 million new and existing from investors to improve balance sheet strength and support growth.
Zip to merge with Sezzle
Sezzle and Zip will merge in an all-shares transaction.
Each Sezzle shareholder will receive 0.98 shares in Zip for very one Sezzle share owned.
Put another way, if you own 100 Sezzle shares, these will be replaced by 98 Zip shares.
The deal is a 22% premium to Sezzle’s last traded price. It is also a 31.7% premium based on a 30-day volume-weighted average price.
Once Zip and Sezzle merge, existing Zip shareholders will own 78% of the combined company. The remaining 22% will be owned by former Sezzle shareholders.
Sezzle’s co-founders, Charlie Youakim and Paul Paradis, who own 48% of the company are expected to vote in favour of the transaction.
Both businesses’ boards of directors have unanimously approved the deal.
Get big or get out
It’s no secret competition has been heating up in the BNPL sector.
Apple Inc. (NASDAQ: AAPL) and Paypal Holdings Inc (NASDAQ: PYPL) have released their own products.
Block Inc (ASX: SQ2) finalised its purchase of Afterpay in January to drive customer and merchant engagement.
Even Commonwealth Bank of Australia (ASX: CBA) is getting in on the action.
In order to keep up with the behemoths, Zip and Sezzle have joined forces to achieve better scale.
“We are delighted to be bringing Zip and Sezzle together under a transformational transaction that is expected to deliver immediate scale and enhanced growth, which will support our path to profitability”
Only a handful of BNPLs will become winners in the long run, and it’s likely to be the ones with the most customers and most merchants.
A bigger company also means lower funding costs and potential synergies.
Zip expects to save $60-$80 million by FY24 via reducing combined employee expenses and administration.
A further $40-50 million in revenue and margin synergies are expected via an enlarged customer base.
Investors ask to tip in an extra $200 million
In addition to announcing the merger with Sezzle, Zip will raise $198.7 million from investors at $1.90 per share.
This represents a 14% discount to Zip’s last trading price of $2.21 on Friday.
The business will raise $148.7 million from sophisticated investors via a fully underwritten institutional placement.
Existing Zip shareholders will also be able to participate in a $50 million non-underwritten share purchase plan.
Funds will be used to support Zip’s integration of Sezzle and increase balance sheet strength.
