Outlook for Zip share price ‘uncertain’ following scrapped merger: UBS

The Zip Co Ltd (ASX: ZIP) share price is up 7% in early afternoon trading to 53 cents per share.

Investors are bidding up the ASX buy now, pay later (BNPL) company following the report its merger with Sezzle Inc (ASX: SZL) will not proceed, under a mutual agreement.

Zip originally announced its intention to acquire Sezzle on 28 February, intending to pay about $491 million for its rival BNPL company. With the deal off the table, Zip will pay Sezzle $11 million in fees.

Sezzle shares crashed 33% on the news today.

And the outlook for the Zip share price is now uncertain, according to leading broker UBS.

Lower costs with slower scaling ahead

UBS said that while Zip will see less money flowing out the door now that it won’t acquire the unprofitable Sezzle, the scrapped merger will also slow its expansion plans in the massive BNPL market of the United States.

And that means investors who’d assumed the merger would go through – as Zip indicated just three weeks ago – may need to re-evaluate the outlook for the Zip share price.

According to Tom Beadle, analyst at UBS (quoted by The Australian Financial Review):

The termination of the proposed merger has the potential to slow Zip’s near-term cash burn given Sezzle is loss-making, but it also slows the scaling of Zip’s US business, where we continue to have concerns around transaction frequency.

With macroeconomic and market conditions cited as a reason, we believe this adds further uncertainty to the near-term outlook, and highlight recent work we published on Zip’s credit risks which indicates that Zip’s credit performance is likely to remain soft this half, with initiatives taken to improve credit performance likely to impact in FY23.

Prior to the termination of its merger with Sezzle, UBS had a sell rating on the company with a 45-cent target for the Zip share price. That will now be reassessed.

Zip share price snapshot

Despite today’s welcome boost, the Zip share price remains down a painful 88% in 2022.

That compares to a year-to-date loss of 14% posted by the All Ordinaries Index (ASX: XAO).

The post Outlook for Zip share price ‘uncertain’ following scrapped merger: UBS appeared first on The Motley Fool Australia.

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More reading

• Why Allkem, Kogan, Metcash, and Sezzle shares are sinking
• Why Eagers Automotive, Viva Energy, Woolworths, and Zip shares are rising
• ASX 200 midday update: Zip scraps Sezzle merger, Lake Resources’ short seller attack
• Zip share price jumps 6% after merger deal with Sezzle is cancelled
• Sezzle share price plunges 35% as Zip merger scrapped

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in 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 Scott Phillips.

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