Back in February, Zip Co Ltd (ASX: ZIP) announced that it would be moving to acquire its fellow ASX buy now, pay later (BNPL) share Sezzle Inc (ASX: SZL). At the time, this was the largest ever merger of two ASX BNPL shares if we don't include Block Inc (ASX: SQ2)'s takeover of Afterpay.
But in the months following this announcement, both the Zip and Sezzle share prices have slumped. Badly.
Back in February, Zip held a capital raise to fund the Sezzle acquisition at $1.90 a share, which was a 14% discount to the Zip share price at the time. On Friday, Zip shares were going for 92 cents each after the company touched a multi-year low of 87 cents on Thursday. Likewise, Sezzle shares have fallen from over $2 in February to around 60 cents as of yesterday.
So these share price movements have caused some doubts as to whether the merger will still go ahead on the previously announced terms (or at all). Not that the companies have said anything.
Shotgun wedding: Will Zip investors pay later if it buys Sezzle now?
But one ASX expert investor is hoping that the merger doesn't happen. According to reporting in the Australian Financial Review (AFR) this week, Andrew Brown, founder of hedge fund East 72, reckons Sezzle's entire future is resting on the Zip acquisition, saying "I don't see how they're going to raise any capital, other than on the most distressed terms".
But he's not advocating Zip press ahead with the deal:
When you strip the balance sheet down basically in US dollars for Sezzle, they've got $US110 million in receivables, they've got $US95 million they owe the merchant interest program… They've got accrued expenses of $US14 million, so without Goldman and Bastion [Sezzle's securitised funding lenders] if the merchants start wanting their money back… they've got a real problem…
The bigger question if you're a Zip shareholder, which I obviously am not, is why is Larry Diamond [Zip's CEO] effectively paying $200 million even at the much-reduced Zip share price… Because it's a scrip swap for Sezzle, it's not worth anything … somebody might look to buy Zip down the track, but Zip should not buy Sezzle; it should pay the fee and walk away.
So that's pretty emphatic there. It will be interesting to see if this ASX BNPL marriage happens later this year, all of these things considered. But it's fairly certain Mr Brown won't be attending the wedding.
