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Zip Co co-founder and chief executive Larry Diamond.Credit:Dominic Lorrimer

The announcement came as Zip also reported a $214.3 million loss for the December half,and Mr Diamond acknowledged there had been a shift in the external environment that was pushing the company to put greater focus on profitability.

BNPL firms - which provide short-term instalment loans to consumers - have seen sharp share price falls in recent months as rising interest rates tend to erode the valuation investors are prepared to put on loss-making “growth” tech stocks.

Mr Diamond said that after buying Sezzle the company would be well-placed to compete,helped by a model that allows it to offer competitive pricing to merchants because it also charges consumers a fee for the service.

“When you look at the competitive landscape,we’re actually pretty excited by it,” Mr Diamond said. “We welcome competition and think we have a strategically differentiated proposition in the US market.”

Zip’s key competitors in the US market are Block-owned Afterpay,Klarna,Affirm and PayPal,while banks are also offering BNPL services as more customers turn their back on traditional credit.

Under the merger,which was supported by both company boards,Zip is offering 0.98 Zip shares for every Sezzle share. That represents a 22 per cent premium to Sezzle’s closing price. Zip shares were placed in a trading halt as the company is raising $148.7 million in new equity to help strengthen its balance sheet and “execute on the potential synergies” from the Sezzle deal.

Zip was founded by Mr Diamond and Peter Gray in 2013 and has been the subject of mounting merger speculation since last year’s $39 billion takeover ofAfterpay by US fintech Square. Sezzle,founded byCharlie Youakim,listed on the ASX in 2019,and has positioned itself as an entry point for young consumers into financial products. Mr Youakim will join an expanded board of Zip and become chief executive of the Americas,covering the US,Mexico and Canada.

Zip said buying Sezzle could lead to $130 million in benefits to earnings before tax,depreciation and amortisation (EBTDA) by 2024. It said it expected to be “EBTDA and cashflow positive” by 2024.

UBS analyst Tom Beadle said Zip’s capital raising appeared aimed at addressing “near term liquidity concerns,” and he estimated that to break even,Zip would require higher lending and further cost cuts. He predicted that “cash burn” was likely to continue over the next 18 months.

Tribeca Investment Partners portfolio manager Jun Bei Liu said gaining scale remained critical for BNPL players,and she would not be surprised if Zip ends up being involved in more consolidation in the future. Rising interest rates,which mean capital is becoming more expensive,are also putting pressure on BNPL firms to have a plan to move into profitability.

“The key is you’ve got to have scale,and you’ve got to be able to have enough capital to invest in keeping the customer in the eco-system,” Ms Liu said.

Zip’s results said the loss was driven by a number of non-recurring items,including acquisition costs,rebranding costs and the impairment of goodwill in its UK business.

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