Xero aims to crack US market by buying accounting platform Melio Payments

The ASX-listed accounting software titan has made its biggest acquisition under chief executive Sukhinder Singh Cassidy as part of an aggressive bid to finally crack the competitive US market.

Xero CEO Sukhinder Singh Cassidy says the Melio deal is aimed to solve a ‘critical customer need’.

Xero hopes to crack the US market by striking its biggest ever deal in acquiring New York-based accounting platform Melio Payments for $US2.5bn ($3.9bn) in a move chief executive Sukhinder Singh Cassidy labelled a “step change” for the New Zealand firm.

It is the first major acquisition that Ms Singh Cassidy has made during her tenure, which began in early 2023.

The Melio deal aimed to solve a “critical customer need”, combining accountants and payments on one platform.

“Adding Melio’s world-class team, technology platform, and innovative accounts payable solutions to Xero enables a step change in our North America scale and the potential to help millions of US small and medium-sized businesses and their accountants better manage their cash flow and accounting,” Ms Singh Cassidy said.

“Xero and Melio are highly complementary — together they complete the key jobs to be done for US SMBs (small medium businesses), extend reach across customer segments, provide both direct and syndicated offerings, and deliver multiple revenue drivers.”

Xero CEO Sukhinder Singh Cassidy. Picture: Supplied

Xero already has about 400,000 customers in the North American market amassed during the past decade. But Ms Singh Cassidy said the US was highly competitive and customers were demanding more functionality from software providers – hence the acquisition of Melio.

Melio has about 80,000 customers and processed about $US30bn of payments last year, generating $US153m in revenue.

The deal represents a 13.4 times enterprise value to revenue multiple, off revenue of $US187m. Expectations are for $US70m in revenue synergies and $US20m of cost efficiencies by FY28.

Xero is not the only ASX company eyeing the US; WiseTech borrowed $4.6bn last month to take over New York-listed logistics software company e2open.

Ms Singh Cassidy expected to take 12 months to integrate the Xero and Melio’s systems and realise the deal’s benefits. The company’s FY26 guidance remains unchanged.

“Our ability to go sell it and realise that synergy value begins pretty shortly thereafter,” she said.

“If you own more of the economics, you can then go acquire customers with more and more confidence that you can monetise them fully. So I think this is pretty critical to what I call creating a virtuous cycle of greater customer value, greater customer economics, investing more in acquisition, which drives the company in the US to scale faster and get to profitability and break even sooner than it would do if it only had one job on the platform.”

Xero will fund the deal through a fully underwritten $1.85bn institutional placement, $US360m of Xero shares issued to Melio shareholders, a fully underwritten $US400m credit facility, and $US600m of cash.

“Melio was not for sale. It was just completing its fundraising in October. Lucky for us, the founders of Melio see the same need for accounting and payments to go together if you really want to win bigger in the US, they see it on their end too.”

Ms Singh Cassidy said Xero’s balance sheet strength will be maintained through this transaction with pro forma FY25 net debt / earnings before interest, tax, depreciation and amortisation of about 2.3 times. “Xero expects to continue generating positive cash flow following the transaction, and for this to facilitate a meaningful deleveraging profile in the coming periods,” she said.

E&P analyst Paul Mason said the price tag for Melio “looks pretty full for the stand-alone business, but works if you think the company can pull off strategic synergies around greater distribution of both products on a combined basis”.

“This will likely be a bit of a departure from a fully open ecosystem approach for Xero over time if they are to heavily cross-sell into their base, but on the flip side payments businesses are 100 per cent about scale economies and distribution so if Xero is successful at selling Melio into its base then this will provide a path to much bigger earnings for the company in payments over time,” Mr Mason wrote in a note to investors.

“Melio is significantly loss-making at present, as such the operating leverage story for Xero temporarily stops – the company had been signalling a big US marketing spend coming in FY27 anyway so market needed to start adapting expectations.”

Ross Barrows of Wilsons Advisory said the ‘buy over build’ strategy would “not only materially accelerate Xero’s US ambitions, but also its plans for a more broad offering globally”.

“Upon completion of this acquisition, Xero will now have a full money-movement workflow which will close the feature gap with (rival QuickBooks owner) Intuit in the US,” Mr Barrows said.

“Commercially, Melio’s strong customer base growth will provide Xero with a significant cross-sell opportunity and its broadened product suite will increase the LTV (total lifetime value) per user.”

RBC Capital Markets analyst Gary Sherriff said the deal makes sense, longer term. He has a $210 price target for Xero; it was trading at $194.21 before entering a halt on Wednesday.

But he said the acquisition throws up a number of questions, including a changed revenue model focused on transaction volumes in the US and whether this revenue is viewed as higher quality versus subscription revenue.

“Implementation (is expected) to take time and outcomes are uncertain given Xero’s mixed record of M&A historically, albeit under different management,” Mr Sherriff said.

“(The) proposed transaction is aligned with management’s strategy of expanding US presence, targeting US revenue and average revenue per user tripling and group revenue more than doubling by close of FY28. We expect a divergence of estimates on the street.”

Citi analyst Siraj Ahmed expected its shares to come under pressure in the short term.

“We like the Melio acquisition as we believe it will help Xero to control more of the economics in the US,” Mr Ahmed, who also has a $210 price target, said.

“Further, we think the syndication capability and being embedded with banking partners could help accelerate Xero’s core accounting growth in the US, as we see the banking channel as an attractive small and medium-sized business acquisition channel.”

Originally published as Xero aims to crack US market by buying accounting platform Melio Payments