Xero’s $2.5B Bet on Melio to Double US Revenue by FY28

Strategic Acquisition to Accelerate US Expansion

Xero Limited (ASX – XRO) has entered into a definitive agreement to acquire 100% of Melio Limited, a high-growth US-based payments platform, for an upfront consideration of US$2.5 billion. This acquisition is a cornerstone of Xero’s ambitious 3x3 strategy, which focuses on completing the core jobs of accounting, payments, and payroll across its three primary markets – Australia, the UK, and the US.

The deal is structured with a combination of a fully underwritten A$1.85 billion institutional placement, issuance of scrip to Melio shareholders, a US$0.4 billion revolving credit facility, and existing cash reserves. Xero also plans a non-underwritten share purchase plan (SPP) to offer eligible shareholders an opportunity to participate.

Melio’s High-Growth Payments Platform

Founded in 2018 and headquartered in New York with a significant R&D hub in Tel Aviv, Melio has established itself as a leading US bill pay player with a remarkable 127% compound annual growth rate in revenue from FY21 to FY25. The platform processes approximately US$30 billion in total payments value annually and serves around 700,000 transactions per month.

Melio’s intuitive accounts payable workflows, AI-powered bill capture, and flexible payment options have earned it a strong Net Promoter Score of 45, reflecting high customer satisfaction. Its scalable syndication model, partnering with over 3,500 financial institutions, extends reach to millions of US small and medium-sized businesses (SMBs).

Compelling Financial and Strategic Fit

On a pro forma FY25 basis, the combined Xero-Melio business is expected to deliver a threefold increase in average revenue per user (ARPU) in North America, significantly enhancing Xero’s US proposition and scale. The acquisition is projected to more than double Xero’s FY25 group revenue by FY28, excluding anticipated revenue synergies estimated at US$70 million and cost synergies of US$20 million.

Xero’s balance sheet strength is expected to be maintained post-transaction, with a pro forma net debt to EBITDA ratio of approximately 2.3x. The company anticipates continued positive cash flow generation, supporting a meaningful deleveraging profile in the coming periods.

Integration and Growth Outlook

The integration plan focuses on leveraging complementary strengths to drive velocity and scale. Melio’s CEO will oversee the combined US business, reporting directly to Xero’s CEO. The combined platform aims to offer seamless accounting, payments, and payroll services tailored for US SMBs, unlocking new customer segments and expanding monetisation opportunities.

Further growth drivers include extending Xero’s accounting capabilities into Melio’s syndication network, cross-selling opportunities to expand ARPU, and potential new product launches such as spend management solutions.

Risks and Considerations

While the acquisition presents significant growth potential, Xero has highlighted several risks. These include integration challenges, retention of Melio’s key personnel, regulatory approvals; particularly US antitrust and state money transmitter licenses; and geopolitical risks related to Melio’s Israeli operations amid ongoing regional hostilities.

Market competition in the payments space remains intense and evolving, with rapid technological changes such as AI posing both opportunities and threats. Xero acknowledges that actual outcomes may differ materially from projections due to these and other factors.

Completion of the acquisition is targeted within six months, subject to customary conditions precedent and regulatory approvals. The equity raising is fully underwritten for the institutional placement, while the SPP remains non-underwritten.