The Zip Co Ltd (ASX: ZIP) share price is up 7% in early afternoon trading to 53 cents per share.
Investors are bidding up the ASX buy now, pay later (BNPL) company following the report its merger with Sezzle Inc (ASX: SZL) will not proceed, under a mutual agreement.
Zip originally announced its intention to acquire Sezzle on 28 February, intending to pay about $491 million for its rival BNPL company. With the deal off the table, Zip will pay Sezzle $11 million in fees.
Sezzle shares crashed 33% on the news today.
And the outlook for the Zip share price is now uncertain, according to leading broker UBS.
Lower costs with slower scaling ahead
UBS said that while Zip will see less money flowing out the door now that it won't acquire the unprofitable Sezzle, the scrapped merger will also slow its expansion plans in the massive BNPL market of the United States.
And that means investors who'd assumed the merger would go through – as Zip indicated just three weeks ago – may need to re-evaluate the outlook for the Zip share price.
According to Tom Beadle, analyst at UBS (quoted by The Australian Financial Review):
The termination of the proposed merger has the potential to slow Zip's near-term cash burn given Sezzle is loss-making, but it also slows the scaling of Zip's US business, where we continue to have concerns around transaction frequency.
With macroeconomic and market conditions cited as a reason, we believe this adds further uncertainty to the near-term outlook, and highlight recent work we published on Zip's credit risks which indicates that Zip's credit performance is likely to remain soft this half, with initiatives taken to improve credit performance likely to impact in FY23.
Prior to the termination of its merger with Sezzle, UBS had a sell rating on the company with a 45-cent target for the Zip share price. That will now be reassessed.
Zip share price snapshot
Despite today's welcome boost, the Zip share price remains down a painful 88% in 2022.
That compares to a year-to-date loss of 14% posted by the All Ordinaries Index (ASX: XAO).
