Late last month Zip Co Ltd (ASX: Z1P) confirmed speculation that it was in discussions with buy now pay later rival Sezzle Inc (ASX: SZL) in relation to a potential acquisition.
The company advised that it is always interested in pursuing options that are in the best interests of shareholders. Though, it warned that the discussions with Sezzle are preliminary in nature and there was no certainty that they would result in a transaction of any kind.
And while no details have been provided in respect to the potential terms of the deal, that hasn’t stopped analysts from looking into the potential consequences.
What are analysts saying?
One broker that has run the rule over the potential acquisition is Citi.
According to the note, it feels the acquisition of Sezzle could help Zip scale up in the key United States market, but it isn’t convinced it is the right strategy.
Citi commented: “While we understand the need for Zip to increase scale in the US, we have mixed views on [the] potential acquisition of Sezzle.”
The broker’s main concerns are the deal being unlikely to change Zip’s competitive position and the costs it would be paying to acquire Sezzle’s customer base.
“We see Sezzle as largely complementary in terms of the US consumer and retailer base and Zip could leverage their partnerships (e.g. Discover) to accelerate growth. However, it would not really alter Zip’s competitive position and does not immediately change the Enterprise merchant base in a meaningful way.”
“Further, from a customer acquisition standpoint we see it as an expensive strategy (4.3x Zip’s 2H21 CAC using Sezzle’s market cap and applying 75% of the transaction value to the consumer base) and question whether it would be better to strike equity deals with key enterprise retailers in the US,“ it added.
Though, from a sector perspective, the broker concedes that “increasing consolidation activity as positive for industry profitability.”
Citi currently has a neutral rating and $3.65 price target on Zip’s shares. This compares to the latest Zip share price of $3.04.
The post Is Zip’s (ASX:Z1P) potential acquisition of Sezzle the right strategy? appeared first on The Motley Fool Australia.
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More reading
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- How much value would buying Sezzle add to the Zip (ASX:Z1P) share price?
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- ASX 200 (ASX:XJO) midday update: Ansell crushed, ResMed upgraded
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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