The Xero Ltd (ASX: XRO) share price won't be going anywhere today.
That's because the small business cloud accounting platform provider has requested a trading halt this morning.
Why is the Xero share price in a trading halt?
Xero has requested a trading halt while it raises funds for a major acquisition.
According to the release, Xero has entered into a binding agreement to acquire 100% of US-based bill payments platform Melio for an upfront consideration of US$2.5 billion (A$3.9 billion), plus up to US$0.5 billion in contingent payments to employees over three years.
Melio is a fast-growing payments platform that is designed to help small businesses pay bills and manage accounts payable in the United States. It has approximately 80,000 customers and generated annualised revenue of US$187 million for the 12 months ended 31 March.
Xero believes the acquisition is a game-changer for its North American ambitions. It highlights that the Melio acquisition "delivers a step change in Xero's US value proposition and scale, accelerating its 3×3 strategy and global high growth aspirations."
It also believes that it will help to significantly accelerate US revenue growth and give it the opportunity to more than double FY 2025 group revenue by FY 2028, excluding anticipated revenue synergies. Another positive is that this outcome is expected to support Xero's aspiration to deliver greater than Rule of 40 outcomes.
'Thrilled'
Commenting on the acquisition, Xero's CEO, Sukhinder Singh Cassidy, said:
We're thrilled to announce we're acquiring Melio, a leading, high-growth US B2B payments platform that strongly aligns with our 3×3 strategy and US growth ambitions. Adding Melio's world-class team, technology platform, and innovative A/P solutions to Xero enables a step change in our North America scale and the potential to help millions of US SMBs and their accountants better manage their cash flow and accounting on one platform.
Xero and Melio are highly complementary — together they complete the key jobs to be done for US SMBs, extend reach across customer segments, provide both direct and syndicated offerings, and deliver multiple revenue drivers.
Equity raising
Xero revealed that it intends to fund the transaction through a combination of equity, scrip, debt, and cash on hand.
This comprises a fully underwritten $1.85 billion institutional placement at $176.00 per share (a 9.4% discount to yesterday's close), $0.36 billion in Xero shares to Melio shareholders, a new US$0.4 billion revolving credit facility, and approximately US$0.6 billion of existing cash.
In addition, retail investors will also have the opportunity to participate in a share purchase plan (SPP), which is targeting a further $200 million in proceeds.
Xero said the deal will see pro forma net debt/EBITDA rise to ~2.3x, but the company expects to remain cash flow positive and to deliver "a meaningful deleveraging profile in the coming periods."
What now?
The Xero share price will remain in a trading halt until either the placement is complete or the start of trade on Friday.
Given the strategic nature of the deal and the potential to supercharge Xero's US growth, investors will be watching closely to see how the market reacts once its shares return to trade.
