Sezzle (ASX:SZL) and Zip Co (ASX:ZIP) abandon merger deal

Sezzle (ASX:SZL) and Zip Co (ASX:ZIP) have mutually dropped their deal to merge, effective immediately, blaming current macroeconomic and market conditions.

The agreement around the merger unveiled in February was a “definitive agreement” under which Zip agreed to acquire Sezzle in an all-scrip transaction.

Zip will pay Sezzle $15 million (US$11 million) for legal, accounting, and other costs relating to the transaction.

Investors were awaiting the merger with Zip Co after Sezzle’s weak March quarter update.

Sezzle’s average usage per customer was below expectation, leading to a 13 per cent miss, according to Ord Minnett’s revenue forecast. The broker also cited that the buy-now pay-later sector had been exposed to weaker e-commerce figures, lowering Sezzle’s year-on-year growth to 20 per cent. The business had continued to reduce costs, scaling back efforts in Europe and ending payment processing in India.

The deal was expected to deliver immediate scale and enhanced growth, supporting Zip Co’s path to profitability and expanding Zip’s footprint in the US. The management team at Zip were “impressed by what the Sezzle team has achieved”, which included their responsible lending framework, their Sezzle Up credit builder program, as well as their B Corp certification.

UBS stated this month that loan book growth is key to Zip Co achieving profitability, which equates to taking on more risk. Zip Co’s bad debt expense rose 12.4 per cent in the first half, up from 7.4 per cent in the previous year, according to the broker. Despite initiatives being taken to improve credit performance, the broker anticipates credit quality to remain soft this half, with improvement more likely in financial year 2023.

Chair of the Zip Board Diane Smith-Gander said, “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.”

“While we were excited by the potential of this transaction, our Board and management team are laser-focused on our strategy and execution,” stated Charlie Youakim, cofounder, executive chairman, and chief executive officer of Sezzle. “We remain dedicated to driving toward profitability and free cash flow and believe this is the best outcome for our shareholders.”

Shares in Sezzle (ASX:SZL) closed at 41.5 cents yesterday while shares in Zip Co (ASX:ZIP) closed at 50 cents yesterday.