Is 2022 for BNPL Consolidation? (ASX: Z1P)

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

Source: Tradingview.com

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

Zip and Sezzle confirm merger talks

A week after releasing its December quarterly – showing record trading volume and revenue – Zip confirmed today that it is in talks with Sezzle about a possible acquisition.

Monday, The Australian reported that Zip and Sezzle have reignited talks in recent weeks, with a certificate acquisition front and center.

Zip and Sezzle had similar discussions a few months ago, but the talks broke down when Zip reportedly backed off from SZL’s asking price.

Like the Australian Noted:

DataRoom has learned that exclusive negotiations have again taken place in which suggestions have been made which Zip could pay a premium of up to 50% for its smaller competitor.

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

Today, Zip and SZL responded to media speculation by issuing brief statements to the ASX.

Z1P has confirmed that it is in talks with Sezzle regarding a potential acquisition.

However, BNPL action said ongoing discussions are “preliminary in nature and there is no certainty that the discussions will result in a transaction of any kind.’

Sezzle echoed his counterpart’s cautious language, emphasizing the preliminary nature of the talks:

No definitive agreement has been reached between the parties regarding 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 perfectly aware of their information obligations?

Or can the emphasis on uncertainty and the preliminary nature of these talks reveal anything substantial about how these talks are unfolding?

Zip and Sezzle follow Latitude and Humm

However, Zip and SZL aren’t the only BNPL stocks considering joining forces.

Earlier this month, Latitude Group Holdings Ltd [ASX:LFS] made an offer of $335 million for Humm Group Ltd.it is [ASX:HUM] credit cards and BNPL.

For LFS, the strategic rationale was clear.

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

But what is the strategic logic behind Zip’s acquisition of Sezzle?

Why is Zip targeting Sezzle?

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

Z1P and SZL earn revenue from processing BNPL transactions and charging merchants and customers fees from late fees, or monthly membership fees in the case of Zip.

zipper Is it that have Zip Money, which is an installment option for purchases over $1,000.

Zip Money offers a three-month interest-free period. But any outstanding balance at the end of the interest-free period will accumulate 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?

It is difficult to answer these questions using the current data available.

Perhaps if the talks between Sezzle and Zip grow, the two BNPL stocks would release more information on the benefits of the merger.

But one of the biggest benefits analysts can see right now is critical mass – getting enough customers to grow trading volume to a standalone level.

Addressing the Sydney Morning HeraldTribeca Investment Partners portfolio manager Jun Bei Liu said an SZL/Z1P merger was logical growth ground.

Zip and Sezzle need to grow to stay 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 that even if the merger goes through, the new entity will still be ‘rather small’ compared to market leaders.

In its most recent quarter, Sezzle had 3.19 million active consumers. And in its last quarterly, Zip had 9.9 million.

In FY21, Afterpay had over 16 million customers.

Growing competition is another important reason for recent merger talks in the BNPL space.

As Morningstar analyst Shaun Ler put it:

I feel like all of these BNPL companies are somehow in a situation where they have to do forced mergers.’

Now, if you are interested in fintech and want to know more, I suggest you read our latest fintech report for 2022.

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

Greetings,

Kiryll Prakapenka,
For silver morning

PS: Our Money Morning publication is a fantastic place to start your investing journey. We talk about the big trends driving the ASX’s most innovative stocks. Learn everything here

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