Zip and Sezzle Talks: Is 2022 For BNPL Consolidation? (ASX:Z1P)

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Zip Co Ltd [ASX:Z1P] and Sezzle Inc [ASX:SZL] today confirmed they are discussing a potential acquisition, as the depressed BNPL sector considers consolidation.

ASX Z1P - ZIP Co Share Price ChartSource: Tradingview.com

At time of writing, SZL shares were up 10%. Z1P shares were flat, however.

Zip and Sezzle confirm merger talks

A week after releasing its December quarterly — revealing record transaction volume and revenue — Zip today confirmed it’s talking with Sezzle about a potential acquisition.

On Monday, The Australian reported that Zip and Sezzle have revived talks in recent weeks, with a scrip acquisition a central focus.

Zip and Sezzle held similar discussions a few months ago but talks ended when Zip purportedly balked at SZL’s asking price.

As The Australian noted:

DataRoom has learned that exclusive negotiations have again been unfolding in which suggestions have been made that Zip could be paying a premium of as much as 50 per cent for its smaller competitor.

Involved in the deal are understood to be Goldman Sachs, Bank of America and Jarden, with the latter two parties known to have been close to Zip Co.

Today, Zip and SZL addressed media speculation by releasing brief statements to the ASX.

Z1P confirmed it was in discussions with Sezzle in relation to a potential acquisition.

However, the BNPL stock said the current discussions are ‘preliminary in nature and there is no certainty that the discussions will results in a transaction of any kind.’

Sezzle echoed the cautious language of its counterpart, emphasising the preliminary nature of the talks:

No definitive agreement has been reached between the parties in relation to any transaction. There is no certainty at this time that these discussions will result in a transaction.’

Is this the qualified language of two listed companies acutely aware of their disclosure obligations?

Or can the heavy emphasis on uncertainty and the preliminary nature of these talks reveal anything substantive about how these talks are going?

Zip and Sezzle follow Latitude and Humm

Whatever the case may be, Zip and SZL aren’t the only BNPL stocks thinking of joining forces.

Earlier this month, Latitude Group Holdings Ltd [ASX:LFS] made a $335 million offer for Humm Group Ltd’s [ASX:HUM] credit card and BNPL businesses.

For LFS, the strategic rationale was clear.

80% of Latitude’s personal loans come from cross-selling to its BNPL customers. Acquiring HUM’s BNPL business would double its potential customer base.

But what is the strategic rationale for Zip acquiring Sezzle?

Why is Zip targeting Sezzle?

Unlike Latitude, Zip doesn’t have an explicit personal loan product it can cross-sell to.

Both Z1P and SZL derive income from processing BNPL transactions and charging merchants a fee and customers any late fees, or monthly membership fees in the case of Zip.

Zip does have Zip Money, which is an instalment option for purchases of more than $1,000.

Zip Money offers a three-month interest-free period. But any balance outstanding at the end of the interest-free period will accrue a ‘standard annual interest rate, currently 19.9%’.

Would acquiring Sezzle’s customer base help direct more users to Zip Money? And would that move the needle in terms of profitability?

These questions are hard to answer using the current data available.

Maybe if the talks between Sezzle and Zip develop, the two BNPL stocks would release further information espousing the benefits of the merger.

But one of the biggest benefits analysts can see right now is critical mass — getting enough customers to raise transaction volume to a self-sustaining level.

Speaking to the Sydney Morning Herald, Tribeca Investment Partners Portfolio Manager Jun Bei Liu said a SZL/Z1P merger made sense growth grounds.

Zip and Sezzle need to grow in size to remain competitive against big players Affirm, Klarna, and Block’s Afterpay…

Especially with traditional players like PayPal and Commonwealth Bank joining the fray.

But Jun Bei Liu thinks even if the merger goes through, the new entity will still be ‘quite small’ compared to the market leaders.

In its latest quarterly, Sezzle had 3.19 million active consumers. And in its latest quarterly, Zip had 9.9 million.

In FY21, Afterpay had more than 16 million customers.

The rising competition is another big reason for the recent merger talks in the BNPL space.

As Morningstar analyst Shaun Ler said:

I do feel that all these BNPL companies, they are sort of in a situation where they need to make forced mergers.’

Now, if you’re interested in fintechs and want to find out more, I suggest reading through our latest fintech report for 2022.

It profiles three promising fintechs. Coincidentally, one of them is the only profitable BNPL stock in Australia.

Regards,

Kiryll Prakapenka,
For Money Morning

PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here

About Kiryll Prakapenka

Kiryll Prakapenka is a research analyst focusing on investigating the biggest trends in investments. Kiryll brings sound analytical skills to his work, courtesy of his Philosophy degree from the University of Melbourne. A student of legendary investors and their strategies, Kiryll likes to synthesise macroeconomic narratives with a keen understanding…

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