Good evening,

Everyone loves a comeback story and Zip Co’s turnaround is no different.

It feels like only yesterday the buy now, pay later sector was staring down a near-death experience as questions swirled about whether companies spurred by an ultra-low interest rate environment could survive. But the $1.3 billion Zip weathered the storm and has even, arguably, turned the corner.

A mid-April market update shows Zip, which has bet heavily on the lucrative US market, is tracking ahead of expectations. The company reported $20.1 million cash EBITDA in the third quarter of 2024 thanks to a strong performance from its US division (see chart below) and upgraded its second-half guidance. Its US growth is also on track, revenue up 50 per cent year-on-year and transaction volume jumping 44 per cent.

The obvious play is for a larger rival like Affirm, Block (which acquired Afterpay) or Klarna to buy Zip in an attempt to consolidate the US market and drive growth. The timing also works for a US name, with the Australian dollar hitting a five-month low earlier this month. However, American players are navigating their own issues and may not necessarily be rewarded for making big M&A moves.

Then there are the big four banks, which are no stranger to buy now, pay later: Commonwealth Bank linking with Swedish outfit Klarna and Westpac with Afterpay, in hopes of locking down the lucrative Millennial and Gen Z demographics who have shied away from credit cards and cross-selling products like insurance and home loans. But there are a bunch of good reasons for them to keep their distance. You don’t have to go far to find someone to dump on buy now, pay later – either the business model or negative societal impact.

Zip is by no means a bargain-basement buy with its stock popping 126 per cent over the past six months. But with regulatory overhang subsiding, a dramatic restructuring program complete and Zip’s stock trading at a price/earnings (forecast next 12 months) discount to its larger strategic peers like Affirm and Klarna, it could make for an interesting target.

No doubt CBA’s internal M&A team adheres by its mandate of looking at all options to maximise shareholder value. As of Sunday, this was not a live deal for CBA, but still an active talking point among its shareholders.

Historically, Zip has been close to Bank of America, which helped it absorb QuadPay in 2020. BofA and Jarden-Evercore were in the Zip camp for the failed Sezzle merger in 2022. However, Zip’s top brass have turned over since with co-founder Peter Gray shifting to head its Australian and New Zealand division. Co-founder Larry Diamond is heading up the US operation. Goldman Sachs has been all over its recent refinancing and fundraising efforts.

Read the full story tomorrow and more on the Street Talk page.

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