The Xero Ltd (ASX: XRO) share price is in focus after the accounting software company announced a major acquisition called Melio.
Xero to buy Melio
The ASX tech share announced it has entered into a binding agreement to buy 100% of Melio, a US small and medium business pay platform that integrates accounting and payments, offering accounts payable workflows and a wide choice of payment methods.
Xero said acquiring Melio delivers a step change in Xero’s US value proposition and scale, accelerating its strategy and global ‘high growth’ aspirations.
The combined business is expected to “significantly accelerate US revenue growth” and give it the opportunity to more than double its revenue in FY28, excluding expected revenue synergies. It will drive a 3x increase in Xero’s North American revenue and average revenue per user (ARPU) on day one.
For Xero and customers, the acquisition solves a critical customer need of uniting accounting and payments in one platform for customers.
Price and funding
Xero revealed that the upfront consideration will be US$2.5 billion, or A$3.9 billion in cash and Xero shares.
An additional amount of up to US$0.5 billion is payable over three years, with the majority of that linked to delivering against certain pre-agreed outperformance targets, while the rest relates to annual business objectives, continued employment and the passage of time.
The upfront payment will be funded through a combination of ways.
First, a fully underwritten A$1.85 billion/US$1.2 billion institutional placement/capital raising.
Second, around US$0.36 billion of new Xero shares will be issued to existing Melio shareholders.
Third, a fully underwritten US$0.4 billion unsecured revolving credit facility.
Finally, Xero will use US$0.6 billion of existing cash on its balance sheet.
Share purchase plan (SPP)
Xero will also offer eligible shareholders the opportunity to take part in a non-underwritten SPP. The ASX tech share is targeting to raise around A$200 million through the SPP.
The maximum application size will be A$30,000 per shareholder, at price of either $176 or a 2% discount to the average Xero share price for the five days up to and including the SPP closing date (currently schedule for 21 July 2025).
Final thoughts on Xero shares
If this acquisition can help Xero unlock stronger growth for its US accounting software business, then it could be a very effective acquisition because the US is a huge market.
Melio sounds like a compelling business, though the deal certainly isn’t cheap for it to be accepted by Melio shareholders.
If I were a shareholder, I’d think about taking part in the capital raising if I thought the $176 price represented good buying considering Xero’s long-term prospects. But, that price is 32% higher than it was a year ago.
I believe Xero is one of the best businesses on the ASX, but it also isn’t trading cheaply either. There are other ASX growth shares that could be better buys.
