ASX-listed Kiwi accounting and fintech software group Xero is set to significantly expand its US presence and hit a key milestone in its strategic growth objectives, announcing it has entered into a binding agreement to acquire the growing US-based B2B bill payments platform Melio.
Xero will pay US$2.5 billion (AU$3.9 billion) to buy out the US fintech, representing a multiple of around 13.4 times the company’s annualised revenue of US$187 million.
This also includes an additional contingent consideration, deferrals and rollovers of up to US$500 million, payable over three years to Melio employees.
Xero said the multiple reflects “the high growth profile of the business, which has delivered a revenue CAGR of 127 per cent FY21-25”.
The Wellington-headquartered accounting software developer hailed the buy-out of Melio, which took $US153 million in revenue last year (31 March year end), as a “powerful strategic fit” and a “step change in Xeroʼs US value proposition and scale”.
Notably, the acquisition, Xero says, will accelerate its 3×3 strategy and global high-growth aspirations, as well as bringing Melio’s “world-class team and platform” into its fold.
Xero’s 3×3 strategy, outlined in its FY25-27 strategy released early last year, is focused on building customer solutions in three core SME functions (accounting, payments and payroll), across its three largest markets (Australia, the UK and the US).
In a statement to the ASX, Xero said it expects the combined business “to significantly accelerate US revenue growth”, potentially more than doubling its FY25 group revenue in FY28.
“This will drive compelling value creation for the US business and the group globally.”
Xero welcomed the substantial increase in its US footprint as a “step change” in its value proposition and scale, which is expected to drive a near three-fold increase in its North American revenue and average revenue per user “on day one”.
Xero notes that the US SME Payments market represents a total revenue opportunity of more than US$29 billion, backed by progressive digitisation of the accounts payable whitespace for B2B payments and increasing demand for software solutions to manage cash flow.
Noting key symmetries between the two businesses, Xero said the acquisition “solves a critical customer need [by] uniting accounting and payments in one platform for customers”.
Melio, launched in 2018 in New York, was founded with the objective of providing an integrated digital solution for US-based SMEs that still overwhelmingly rely on paper-based invoicing, payments, reconciliation and accounts payable/receivables processes. The company, which has its roots in Israel, also maintains an R&D centre in Tel Aviv.
Melio unites SME accounting and payments functions under a single platform, Xero said, providing businesses and their advisers easy-to-use accounts payable workflows and payers their preferred payment method.
“It allows [SMEs] and accountants and bookkeepers in the US to complete the key Jobs to be Done (JTBD) seamlessly in one platform, enabling access to more fulsome ARPU [Average Revenue Per User] economics.”
Melio also offers its products as syndicated white-label offerings, providing vertical SaaS platforms and financial institutions (including Fiserv, Capital One and Shopify) access to Melioʼs services.
“Melioʼs founders have built a leading platform that enables customer flexibility in how they pay vendors and provides purpose-built dashboards and tools for accountant and bookkeeper advisers,” Xero wrote.
“The product is valued by customers, as reflected in: its customer satisfaction score (NPS 45), its monthly ARPU of US$250, industry recognition, and consistent high growth with a very strong 127 per cent revenue CAGR FY21-FY25.”
The Melio platform currently boasts around 80,000 clients, and last year processed around US$30 billion in payments.
Xero noted that the complementary nature of the businesses will drive an expected US$70 million synergy in revenue and around US$20 million in costs, with Melio’s feature-set to be embedded into the Xero platform.
Commenting on the proposed acquisition, Xero chief executive Sukhinder Singh Cassidy said addition of the Melio’s “world-class team, technology platform, and innovative A/P solutions to Xero enables a step change in our North America scale and the potential to help millions of US SMBs and their accountants better manage their cash flow and accounting on one platform”.
“Xero and Melio are highly complementary – together they complete the key jobs to be done for US SMBs, extend reach across customer segments, provide both direct and syndicated offerings, and deliver multiple revenue drivers.”
Singh Cassidy added: “Weʼre excited to welcome Melioʼs world-class team to Xero and look forward to working together to deliver on our shared goals once the transaction completes.
“We will continue to invest in Melioʼs Payments product and leverage Xeroʼs go-to-market expertise to accelerate growth in Melio and Xero in the US.
“In parallel, we will embed Melioʼs features into Xeroʼs core platform, creating a market-leading accounting and payments offering that maximises value for our US customers.”
