BNPL: From hip and sizzle to Zip and Sezzle

The Buy Now Pay later mess got messier Tuesday when the ZIP (ASX:ZIP) – Sezzle (ASX:SZL) merger fell apart and the market realised the Commonwealth Bank’s stake in European giant Klarna, had collapsed.

In a statement to the ASX on Tuesday, Zip said will pay $US11 million ($A16 million) break fee to walk away from the deal to buy out Sezzle in a transaction that was once valued at $491 million.

Investors quickly worked out the winner and loser from the merger’s failure.

Sezzle shares slumped more than 38% to 25.5 cents while Zip shares rose 6% to 56 cents. Not much of a gain but investors see Zip as surviving with the cash raised earlier this year.

The collapse of the merger came after a change in economic conditions, increasing bad debts and a poor outlook for the sector slashed the value of the deal.

And Klarna finally got a new financing round away with investor payments triggering a collapse in the company’s value from nearly $US46 billion in June 2021, to less than $US7 billion.

That in itself was less than half the $US15 billion Klarna had been trying to settle on in a financing round last month, and a fraction of the more than $US20 billion being sought unsuccessfully earlier this year. Klarna raised $US800 million in its latest funding round.

The value of the Commonwealth Bank’s 5.4% stake in Klarna has slid from the $2.7 billion claimed in the June 30, 2021 accounts (and revealed in the 2020-21 annual results last August) to less than $500 million (which is also less than the actual investment in Klarna).

Investors ignored the news and Commonwealth Bank shares rose 1.1% to $93.63.

The collapse in Zip and Sezzle’s merger has been a time coming as the value of the two company’s shares have fallen amid growing investor disenchantment with the BNPL sector.

It faces tighter regulation here and in Europe, bad debts have suddenly been identified and soared and the easing of Covid linked lockdowns as seen online shopping – a prime driver of business in 2020 and 2021 – fade as shoppers returned to bricks and mortar outlets and malls.

Investors were told the joining of the two companies was a way to combine the customer and merchant bases of both groups to create a much larger player that could compete more easily with Afterpay, Klarna and US market leader Affirm.

But that proved illusory as those larger companies have slumped as well (Afterpay’s owner Block has seen its shares slide more than 60% this year while shares in Affirm are down nearly 80% and it has a deal with Amazon).

PayPal and Apple have entered the BNPL space, along with card giants Mastercharge and Visa and with competitors of that scale, smaller companies are going to end up being left behind.

Zip raised $172.8 million from institutional and retail shareholders earlier this year as part of the transaction Sezzle deal and now it has money and no idea.

Zip chairman Diane Smith-Gander pointed to the change in economic conditions since the deal was announced in February.

“We believe that mutually terminating the merger agreement with Sezzle at this time is in the best interests of Zip and its shareholders, and will allow Zip to focus on its strategy and core business in the current environment,” she said in Tuesday’s statement.

Inn its statement Tuesday, Zip said it “is well capitalised to execute on its strategy and in line with previous guidance, Zip continues to expect to deliver group profitability during full-year 2024.”

And Sezzle CEO Charlie Youakim said his group was also dedicated to moving toward profitability and free cash flow as it was the best outcome for shareholders.

“While we were excited by the potential of this transaction, our board and management team are laser-focused on our strategy and execution,” Youakim said.