As Zip acquires Sezzle, buy now, pay later zips from sizzle to fizzle

A combination of two loss-making BNPL players highlights how the sector is now on the ropes and only a handful of players worldwide will survive.

Zip Co founders Larry Diamond and Peter Gray. Picture: Zip

A plan for the struggling – but substantial – Zip Co to acquire its rival Sezzle in a no-cash takeover tells us a lot about the once hot buy now, pay later sector. It’s on the ropes and only a handful of players worldwide will survive.

So-called “all share” arrangements are ideal in this market segment since the BNPL brigade is travelling in the one leaky boat.

Or look at it this way: Zip – which has lost $108m in six months, with a share price down about 80 per cent from its peak – is aiming to buy Sezzle, which is heading for a forecast $100m loss and is also down 80 per cent.

To get the deal done, Zip will pay a 22 per cent premium for its battered target and will then go to the market looking to raise money by offering its own greatly diminished shares on a 14 per cent ­discount.

As consultant Grant Halverson, a long-time critic of the sector, says: “This is now a dance of the desperate. These companies just don’t make a profit, the numbers don’t add up and looming higher interest rates will hit them hard.”

What can investors do?

Australian investors are by no means alone in their exposure to the blow-off in BNPL – it’s happening all around the world. In the US, the share price of Nasdaq-listed Affirm has almost halved inside a fortnight.

Separately, Commonwealth Bank in its most recent results ­reduced the carrying value of its stake in Swedish BNPL champion Klarna by $100m.

Unfortunately, we had an exceptional blitz of listed BNPL activity, which means local investors now have to bear the brunt of an industry consolidation. There were 12 listed stocks in BNPL at the peak. The Zip/Sezzle deal will bring that down to eight survivors.

The luckiest investors will get a lifeboat from a larger group that allows the niche activity of BNPL to be integrated into a larger financial services operator in the fashion of Afterpay and Block.

Afterpay shareholders who did not sell out around the time of the Block deal – when the stock was twice as high as it is now (even allowing for last week’s jump in the Block share price) do at least have a future inside a bigger operation that can carry the loss-making business. Block in turn can take comfort in the fact that Afterpay only represents about 8 per cent of the combined group’s revenues.

Similarly, the best-case scenario in the Zip deal – which is presented as a move to gain extra muscle in the US market – will mean Sezzle shareholders get the comfort of moving into a larger operation that might ultimately convert big revenue increases into profits – the biggest challenge in the sector.

The combined Zip-Sezzle will have millions of additional customers, putting it leagues above most ASX-listed rivals but still well behind Afterpay, which had more than 16 million at last count.

This limited horizon for BNPL investors is a long way from the dizzy optimism of 2020 that had its early promise extended by the online retail boom in the Covid-19 lockdowns. We are now operating in a very different world, where investors want consistent profits and dividends rather than profitless revenue growth.

Among the profitless stocks left spinning their wheels on the ASX are LayBuy, Openpay, Payright and Splitit.

Worst still, the deep restructuring most BNPL players will have to do to arrive at sustainable profitability means the sector is very probably going to struggle further in the months ahead as we see a rising interest rate environment.

Zip – founded by Larry Diamond and Peter Gray – has been trying to expand simultaneously in multiple markets all over the world – with operations in US, ­Europe, Asia and the Middle East.

Diamond has said the enlarged outfit will undertake cost savings measures to get the business into better shape.

Meanwhile, as rates rise, bad debts in the segment will definitely rise – in the latest Zip results they more than doubled from 1 per cent of total transaction values to 2.6 per cent.

Originally published as As Zip acquires Sezzle, buy now, pay later zips from sizzle to fizzle