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Key points
- Zip is reportedly interested in buying Sezzle
- Would a potential transaction add a lot of value for the Zip share price?
- Brokers are mixed on whether Zip is actually good value today or not
The Zip Co Ltd (ASX: Z1P) share price is in focus as a potential acquisition of Sezzle Inc (ASX: SZL) is considered.
How close is a deal to being done?
Last week, Zip noted recent media speculation about a potential acquisition by Zip of Sezzle.
Zip confirmed that it is in discussions with the US-based buy now, pay later operator. It noted that it's always interested in pursuing options that are in the best interests of shareholders, though discussions are preliminary in nature and there is "no certainty that the discussions will result in a transaction of any kind".
The Zip board also said that it remains committed to ensuring any transaction delivers value to shareholders and will always be disciplined in its assessment of potential opportunities. It will only pursue transformational transactions that help accelerate the delivery of Zip's broader strategic objectives such as enhanced scale in core markets, improved customer and merchant propositions and a faster path to profitability through synergy opportunities.
Would a deal add value to the Zip share price?
As the board said, scale will help improve underlying profitability. Sezzle is also growing in several markets that Zip is also interested in.
Zip is well established in Australia and New Zealand. However, it's growing in places like the UK, as well as 'expansion markets' such as Canada, Mexico, Europe and the Middle East.
Sezzle is predominately focused on the US. It has linked up with some major retailers there including Target and IKEA.
Sezzle is currently targeting growth in Europe (Germany, France, Spain and Italy), India and Canada.
In Canada, Sezzle has surpassed 3,500 active merchants and in the fourth quarter of 2021 it saw underlying merchant sales (UMS) of more than US$41 million – 55.2% growth quarter on quarter. Active customers rose 131.7% year on year to over 225,000.
How much total volume would Sezzle add to Zip and potentially help the Zip share price if acquired? In the three months to 31 December 2021, total UMS increased 74.9% year on year to US$561 million (A$772.2 million, which was 21.8% quarter on quarter growth). Its total income grew 49.1% year on year to US$32.9 million – 5.9% of UMS.
Sezzle's UMS reached an annualised run-rate of US$2.5 billion based on the month of November's performance.
Let's compare that $772.2 million of UMS from Sezzle to Zip's performance in the three months to 31 December 2021. Zip generated quarterly transaction volume of $2.6 billion (which was up 53%). Going by those numbers, Sezzle's UMS was approximately 30% of Zip's total. It would be a very sizeable increase for Zip's US business.
Are the share prices of Zip and Sezzle buys?
Brokers are mixed on Zip shares.
Macquarie currently rates Zip as a sell with the US part of the business seeing slowing growth and underperforming against expectations, the price target is $3.40. Citi rates Zip as 'neutral' with lower growth and increasing net bad debts, the price target is $3.65. Ord Minnett still rates it as a buy, with a price target of $6.
When it comes to Sezzle, Ord Minnett's latest rating is a buy, with a price target of $9.90. But this was before the recent volatility and commentary about interest rates.
