Xero’s $4bn Melio acquisition months in the making

Xero CEO Sukhinder Singh Cassidy. Picture: Supplied

Xero’s relationship with the New York-based venture capital-backed payments platform Melio dates back years from the talks they have had surrounding partnerships.

But it’s only been since late last year that a deal to combine the businesses began brewing with its Israeli founders, including chief executive Matan Bar, Ilan Atias and ex operating chief Zi Paz, and culminated in a $US2.5bn purchase ($4bn) by Xero that was announced on Wednesday.

Until now, Xero’s market share in the US has been relatively small, with most of the revenue for the accounting software provider generated in Australia, New Zealand and the UK.

Under this deal, 17 per cent of Xero’s overall revenue will now come from the US.

Melio, advised by US-based Catalyst, is an accounts payable and receivable platform for small and medium businesses, and last year, a $US150m raise in a strategic funding round valued it at $US2bn.

Participants included Fiserv, Shopify Ventures, Capital One Ventures, Accel, Bessemer, Coatue, Frontline Ventures, General Catalyst, Latitude and Thrive Capital.

This deal values Melio on a multiple of 13.4 times March 2025 annualised revenue of $US187m, and while some analysts think it may be expensive, they see it as worth it for the opportunity to grow in the US, which was always part of its strategy.

The $30bn Australian listed Xero, which is based in Wellington, hopes the rapidly growing start up that has 80,000 customers and $US153m of annual revenue will be the draw card it needs to attract more US customers, keen to pay for a service where all their accounting software and supplier payments needs are in the same place.

Melio is yet to produce a profit, but like many tech start-ups, at just seven years old, it has prioritised growth over profitability and has drawn customers from its ease of use.

The transaction for the accounting software provider capitalises on Xero’s rising share price in the past year, with the deal funded through a $1.85bn institutional placement at $176 a share, a 9.4 per cent discount to the last closing price at $194.21, in addition to a share purchase plan of up to $200m not underwritten.

Xero is supercharging its presence in the US.

Xero, advised by JPMorgan, will also pay for the deal by issuing $US360m of its own shares, taking the price to $US2.5bn or $US3bn ($4.6bn), including deferral payments subject to targets met.

Xero will use $US400m of debt to pay for the deal and the remaining $US600m would be cash.

The purchase has been given wide backing across the market from analysts.

Citi analysts said guidance implied that it would lift its revenue in the 2028 financial year by about 15 per cent higher than expected.

“From a strategic perspective, we see the potential to syndicate accounting through banking partners as a customer acquisition channel for Xero,” said Citi analysts.

“However, it will take time to process the intricacies of the deal and the pathway forward.”

Melio seemed to be more skewed towards mid-sized businesses.

Analysts at RBC agreed that a push into the US through Melio made strategic sense for the longer term, plugging the gap for bill payments for US small to medium enterprises.

RBC cautioned that the acquisition threw up a number of questions, including whether the revenue model focused on transaction volumes in the US was higher quality than subscription revenue, Melio’s current loss making and free cash flow negative position.

It therefore made forecasting the trajectory of cash flow and profitability more complex.

Also, the uncertainty of implementation given Xero’s mixed record of mergers and acquisitions historically.

“Our initial view is there is much to like in terms of bulking up US exposure with a leading, fast-growing payments player and longer term the proposed deal makes sense to us,” RBC said.

Analysts at Wilsons described Xero as a gold standard recurring revenue business, and with its increased operational focus, its clear strategy of ‘pricing for value’ and material scale was now yielding material fruits.

They were confident on its long-term outlook.

Analysts at E&P said the deal fitted with its strategy and was a departure from a fully open ecosystem approach for Xero.

But over time, it could heavily cross-sell into its base.

Payments businesses were 100 per cent about scale economies and distribution so if Xero was successful at selling Melio into its base then this would provide a path to much bigger earnings for the company in payments over time.

While the payments space was highly competitive, the product set provided clearer addressability to the broader US SME population, Wilsons said.

“The acquisition price itself at a higher level 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.”