Xero to acquire US payments firm Melio in $3.9b push into American SMB market

Technology company Xero (ASX: XRO) will acquire US payments processor Melio in a $3.9 billion deal that forms part of its US value proposition and global high-growth aspirations.

Melio services small-to-medium-sized business (SMB) clients and their advisors by integrating accounting and payments functions into one platform, with easy-to-use accounts payable workflows and a wide choice of payment methods.

Xero expects the acquisition to be a “powerful strategic fit” for its ‘3×3’ strategy, which focuses on improving core accounting, payroll and payments solutions within key markets across Australia, the UK and the US.

Growth ambitions

Xero chief executive officer Sukhinder Singh Cassidy said Melio’s business aligned with the company’s US growth ambitions.

“Bringing Melio’s world-class team, technology platform and innovative accounts payable solutions to Xero enables a step change in our North America scale and the potential to help millions of SMB clients and their accountants and bookkeepers to better manage cash flow and accounting on one platform,” she said.

“Xero and Melio are highly complementary businesses—together, we can complete the key jobs to be done for US SMBs, extend reach across customer segments, provide direct and syndicated offerings, and deliver multiple revenue drivers.”

Deal consideration

Xero will fund the acquisition through a $1.85b institutional placement at a fixed offer price of $176 per share, a $554 million Xero scrip issued to existing Melio shareholders, a $615m unsecured revolving credit facility and $923m of existing cash.

The placement price represents a 9.4% discount to Xero’s last closing price of $194.21 and will see the issue of 10.5 million new shares (representing 6.8% of existing issued shares), with eligible shareholders also able to participate in a non-underwritten share purchase plan to raise a further $200m.

Xero could pay Melio an additional $770m based on certain performance targets and after a set time period.

The deal values Melio on a multiple of approximately 13.4x its March annualised revenue of $288m, which Ms Singh Cassidy said reflected the high-growth profile of a business that has delivered a revenue compound annual growth rate of 127% for the four years to 2025.