Larry Diamond, founder and CEO of the Aussie buy now pay later prince Zip Co (ASX:Z1P) has surprised markets on Monday morning with a stunning takeover play for rival Sezzle (ASX:SZL) in a deal worth almost $200 million.

Both companies are in a trading halt as the market digests Zip’s all-scrip offer which will see 222.3 million new shares issued.

The transaction puts a near $500 million value on Sezzle, representing a 22% premium – based on Friday’s closing spot prices of $1.78 for Sezzle) and $2.21 for Zip.

Zip Co — Sezzle

The first all-Aussie BNPL mega-merger – subject to various approvals – has Sezzle stockholders entitled to 0.98 Zip ordinary shares in Zip for every currently held SZL share.

The move continues what analysts have been banking on since Square (now Block) snapped up the Aussie sector’s premier BNPL player Afterpay – the first big consolidation move in an increasingly unwieldy BNPL sector.

The news comes as Zip reports a near 90% just in half-year revenue to well over $300m, after the fintech snapped up Spotii and Twisto in the back-end of 2021.

Those additions helped customer numbers climb by almost 75% to a just shy of 10 million.

However, the stock has come under major pressure in recent months, and like other BNPL players it currently trades around 80% lower than its post-COVID highs.

While Afterpay was valued at around $126 per share by Block Inc at the time of the deal (also an all-scrip transaction), Sezzle’s $1.90 valuation marks a discount of around 83% to its all-time highs above $11.

The Z1P-SZL merger, which was supported by both company boards, is aimed at giving the businesses greater scale in the crucial US market, where the BNPL firms are trying to take on a deep-seated shift away from credit cards.

BNPL firms provide short-term interest free loans, which make revenue from fees charged to merchants and in some cases from consumers.

Larry Diamond called the deal – backed by both boards – “a transformational transaction… expected to deliver immediate scale and enhanced growth.”

Zip expects the deal will be completed by the September quarter.

Deal terms

Shaw and Partners has been appointed as Co-Lead manager to the capital raising by Zip Co Limited.

The share placement component of the deal is expected to raise $148.7m at a fixe price of $1.90, and has been fully underwritten.

This represents a:
– 14% discount to Zip’s last closing price on 25 February 2022 of A$2.21 per share; and
– 15% discount to the VWAP of Zip ordinary shares traded during the 5 trading days up to and including 25 February 2022 of A$2.23 per share.

“After a wall-crossing exercise over the weekend we have indications of demand in excess of the deal size,” Shaw said.

Zip Co will look to raise up to an additional $50m via a share purchase plan, which hasn’t been underwritten.

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