Xero Ltd (ASX: XRO) shares have returned from their trading halt on Thursday and sank deep into the red.
At the time of writing, the cloud accounting platform provider's shares are down 9% to $176.06.
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Why are Xero shares falling?
The catalyst for today's decline has been news that the company has successfully completed its fully underwritten institutional placement.
According to the release, Xero has raised A$1.85 billion (US$1.2 billion) through the placement of approximately 10.5 million shares to sophisticated and institutional investors at $176 per new share. This represents a 9.4% discount to its last close price.
The proceeds raised under the placement will contribute to funding Xero's acquisition of Melio and its associated entities and transaction costs.
Melio is a fast-growing payments platform that is designed to help small businesses pay bills and manage accounts payable in the United States. At the last count, it had approximately 80,000 customers and was generating annualised revenue of US$187 million.
Commenting on the equity raising, Xero's CEO, Sukhinder Singh Cassidy, said:
We're very pleased with the strong support we've received from both existing and new institutional investors for this Placement. We can't wait to welcome Melio's world-class team to Xero, once the transaction completes, and work together to deliver on our shared goals. Melio presents an incredibly exciting opportunity for Xero and we look forward to creating a market-leading Accounting and Payments offering that maximises value for our customers and supports our 3×3 strategy and US ambitions.
The company will now push ahead with a share purchase plan that aims to raise A$200 million. This will be at the lower of the placement price or a 2% discount to its five-day volume weighted average price when the offer closes.
Broker reaction
The team at Macquarie has been running the rule over the acquisition and likes what it sees. It said:
Melio improves XRO's ability to grow in the US, XRO's largest TAM segment at US$29b. Medium-term, the larger risk to XRO is an inability to deliver on US growth, not accretion/dilution on a 1/2 year forward time horizon. This acquisition sures up the 5-10 year growth story.
We think Melio is intentionally under-monetised, with low pricing incentivising faster volume growth. Margin upside in the next 3 years is to be driven by mix shift to highermargin syndication and subscription revenues, as well as scaling payments over a cost base that already reflects investment for the next 3 years.
In response, Macquarie has reiterated its outperform rating and $204.00 price target on Xero's shares.
It feels that investors should take advantage of any share price weakness. It concludes:
Mgmt is walking the walk, making data-driven decisions that invariably lead to better capital allocation outcomes. We have high conviction in >12- month story. However, with upcoming brand reinvestment, any downside from cost growth presents buying opp. Reiterate Outperform.
