By Byron Kaye and Indranil Sarkar

(Reuters) -Australian buy-now-pay-later (BNPL) firm Zip Co Ltd dumped a buyout of U.S. rival Sezzle Inc three weeks after declaring the deal on track, a sign of the abrupt pressure on unprofitable fintech firms brought by soaring inflation.

The timing of the move underscores the sudden cooling in investor sentiment towards speculative technology firms as the Ukraine war and supply chain problems push up inflation and interest rates, eroding consumer purchasing power.

Zip, which owns the Quadpay brand in the U.S., said the two firms agreed to pull the deal because of “current macroeconomic and market conditions”, without elaborating.

The decision was “in the best interests of Zip and its shareholders, and will allow Zip to focus on its strategy and core business,” it added.

In a June 22 trading update about a sell-off in tech stocks, Zip had said it was putting up fees and reviewing global operations outside the U.S., but that “the acquisition of Sezzle remains on track”.

On Tuesday, however, the deal was off, with immediate effect, the companies said.

“What changed since ZIP’s announcement … where the company stated that the transaction remained on track?” RBC Capital Markets analyst Wei-Weng Chen wrote in a client note.

Zip had issued new shares to raise capital when it announced the Sezzle buyout, Chen said, adding, “This could cause some discontent amongst investors who participated.”

Sezzle remains “dedicated to driving toward profitability and free cashflow,” Executive Chairman Charlie Youakim said, adding, “(We) believe this is the best outcome for our shareholders.”

Sezzle’s biggest shareholder is Youakim, with a stake of 44%, Refinitiv data shows.

When the Sydney-listed firms unveiled the all-stock deal in February, they said it valued Sezzle at about A$491 million ($330 million), based on Zip’s share price.

On Tuesday, news of the cancellation sent Sezzle shares down 34%, valuing the company at just A$55 million.

Zip shares bounced as much as 13% by mid-session, ahead of a broader market advance of 0.3%, but are still down about 90% since the start of the year.

“The termination … has the potential to slow Zip’s near-term cash burn,” UBS analyst Tom Beadle said in a client note, adding that Sezzle was loss-making.

But it also slowed the scaling of Zip’s U.S. business, in which transaction frequency concerns persist, he added.

A popular sector with Australian stock investors during COVID-19 due to exposure to the shift to living and working online, BNPL and other fintech firms have in recent months faced imploding takeovers, layoffs, and even collapse.

Another fintech firm, Latitude Group Holdings Ltd, cited market conditions when it cancelled last month a buyout of Humm Group Ltd’s BNPL operations.

Australia’s first online-only bank, which had targeted a similar market, shut down on June 29 because of difficulties raising funds.

($1=1.4868 Australian dollars)

(Reporting by Byron Kaye in Sydney and Indranil Sarkar in Bengaluru; Editing by Rashmi Aich and Clarence Fernandez)

---