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Why the Zip Co share price is set to drop


Shares in the BNPL operator have slid 79% over the last 12 months and are set to continue when Z1P begins trading again.

Shares in buy now pay later (BNPL) operator Zip Co Ltd (ASX: Z1P) are currently in a trading halt, but are set to drop when trading resumes. Shares in rival Sezzle (ASX: SZL) are also in a trading halt but are likely to rise when trading returns.

What is the deal with the Zip and Sezzle stock prices

The 2 firms on Monday announced that Zip Co will acquire its smaller rival in an all-stock deal that values the US-focused Sezzle at $491 million.

Under the deal, Sezzle shareholders will receive 0.98 Zip shares for every share held, implying a 22% premium to the closing stock price last week. That should help boost Sezzle's stock to bring it on level with the bid price.

Meanwhile, Zip said it will raise nearly $200 million through a share placement and a share purchase plan to partly fund the "transformational" deal. Zip is issuing shares at $1.90 each, a 14% discount to Friday's closing price of $2.21, so its stock should slip when trading resumes on account of the equity dilution.

The deal is expected to close by the end of September, at which point Zip shareholders will own 78% of the combined entity while Sezzle holders will keep the remaining 22% stake.

Scale, profitability

The deal is expected to deliver immediate scale and enhanced growth, Zip CEO and co-founder Larry Diamond said. "Combining with Sezzle positions us as a leading global BNPL provider and prioritises our ability to win in the important US market," he said in a statement to the ASX.

The deal comes about a month after US payments giant Block (ASX: SQ2), completed its buyout of BNPL leader Afterpay in a record $39 billion deal.

Zip and Sezzle have been in merger discussions for months to create the largest pure play BNPL operator on the ASX.

The market has long speculated about a merger between Zip Co and Sezzle because of a confluence of factors, including a ramp-up in competition, looming interest rate increases and rising regulatory risks facing the sector.

Zip underlined the importance of the merger, reporting a first-half loss of $172.8 million, lower than the $455.9 million loss a year earlier. Revenue for the 6 months to 31 December jumped 89% to $302.2 million. Its active consumer numbers were up 73.7% to 9.9 million.

However, its cost of sales more than doubled to $242.2 million from $82.8 million a year ago. Bad debts and expected credit losses also surged across the business at $148.3 million for the 6 months to December, from $29.5 million a year earlier.

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