SYDNEY, AAP – Buy now pay later operator Zip Co has agreed to acquire smaller US-focused rival Sezzle in an all-stock deal valuing the target company at $491 million.

Zip says it will raise $199 million through a share placement to investors and a share purchase plan for existing shareholders to part fund the deal.

Zip CEO and co-founder Larry Diamond said the “transformational” deal was expected to deliver immediate scale and enhanced growth, which would support the two companies’ path to profitability.

“Combining with Sezzle positions us as a leading global BNPL provider and prioritises our ability to win in the important US market,” he said in a statement.

The deal comes just weeks after US payments giant Block completed its buyout of Australian BNPL pioneer Afterpay in a record $39 billion deal, leaving Zip as the largest pure play buy now pay later firm listed on the ASX.

Shares of both Zip Co and Sezzle were placed in a trading halt ahead of the announcement.

The two companies have been in merger talks for months as competition in the sector heats up with the entry of heavyweights including PayPal, Apple, CBA and NAB, and valuations dry up over fears of an impending increase in interest rates.

Under the deal announced on Monday, Sezzle shareholders will receive 0.98 Zip shares for every share held, valuing the company’s stock at a 22 per cent premium to its Friday closing price of $1.78 each.

The deal is expected to close by the end of September, at which point Zip shareholders will own 78 per cent of the merged company, with Sezzle shareholders getting the remaining 22 per cent stake.

Zip, which announced a fully underwritten placement to raise up to $199 million, is issuing shares at $1.90 each, a 14 per cent discount to Friday’s closing price of $2.21.

Zip on Monday also reported a first half loss of $172.8 million, down from $455.9 million a year earlier.

Revenue for the six months to December 31 jumped 89 per cent to to $302.2 million following smaller acquisitions, while its active consumer numbers were up 73.7 per cent to 9.9 million.