It's been a dramatic week for the Zip Co Ltd (ASX: Z1P) share price. Let's start with the pause of trading last week. Fresh from announcing a major capital raise program last Friday, Zip shares subsequently went into a trading halt.
The purpose of this capital raise is to fund Zip's acquisition of fellow buy now, pay later (BNPL) company Sezzle Inc (ASX: SZL). This acquisition will be all-scrip. Sezzle shareholders are to receive 0.98 Zip shares for every Sezzle share they own.
Here's how Zip co-founder and global CEO Larry Diamond justified this move when it was announced:
We are delighted to be bringing Zip and Sezzle together under a transformational transaction that is expected to deliver immediate scale and enhanced growth, which will support our path to profitability. Combining with Sezzle positions us as a leading global BNPL provider and prioritises our ability to win in the important U.S. market.
And yet, ASX investors don't seem quite as excited as Diamond. When Zip shares resumed trading on Tuesday this week, they fell significantly. As it stands today, Zip shares have lost 13.74% in value since they resumed trading.
Brokers divided on Sezzle acquisition
Yesterday, my Fool colleague James examined some broker opinions that were positive about this tie-up. Analysts from broker Morgans described the deal as "making strategic sense" and stated that it would increase both Zip's global transaction volumes and customer base by about 30-35%.
However, not all opinions on this merger have been positive. According to reporting in the Australian Financial Review (AFR), analysts at broker Citi reckon there might be a bit too much optimism in what Zip and Sezzle are expecting to gain from this merger.
Citi analyst Siraj Ahmed said that although Zip and Sezzle are estimating that the two companies have a 15% customer overlap, it could be closer to 25%.
He also reckons the $40-50 million in revenue synergies targeted by the companies could be optimistic. Saying that, he does see benefits in transaction margins and faster merchant additions. As well as the "introduction of Sezzle's longer duration products".
Analysts at Macquarie have similar concerns. They predict that bad and doubtful debts are likely to remain high and the companies will take a hit to margins due to rising interest rates.
Macquarie has a share price target of $1.85 for Zip. That's down from $3.40 a share.
Zip share price snapshot
The Zip share price has lost a further 1.79% at the time of writing today. It is currently trading at $1.92. At this share price, the BNPL company has a market capitalisation of $1.14 billion.
