NEW YORK, Dec. 29, 2014 /PRNewswire/ -- Engine Capital LP
(together with its affiliates, "Engine"), a significant shareholder
of each of PFSweb, Inc. (NASDAQ: PFSW) and Speed Commerce, Inc.
(NASDAQ: SPDC), with ownership of approximately 4% of PFSweb and 3%
of Speed Commerce, today announced that it has delivered a letter
to the board of directors of both companies.
The full text of Engine's letter follows:
December 29,
2014
Members of the Board of Directors
c/o Richard Willis, President & CEO
Speed Commerce, Inc.
1303 E. Arapaho Road, Suite 200
Richardson, Texas 75081
Members of the Board of Directors
c/o Michael Willoughby, CEO
PFSweb, Inc.
505 Millennium Drive
Allen, Texas 75013
Dear Board Members:
Engine Capital LP, together with its affiliates ("Engine"), owns
approximately 4% of the outstanding shares of PFSweb, Inc. ("PFSW"
or "PFSweb") as well as approximatively 3% of the outstanding
shares of Speed Commerce, Inc. ("SPDC" or "Speed Commerce"). Both
PFSW and SPDC represent significant investments for Engine. We
invested in both companies because of their attractive business
models (mostly recurrent revenue based on eCommerce transactions),
high growth potential (eCommerce is expected to grow significantly
for the foreseeable future), and their reasonable valuations compared to their
growth profile and comparable transaction multiples. While we think
that both companies have significant and exciting standalone
prospects, we think that a merger of both companies offers an
opportunity to create significant additional value that would not
detract in any way from the existing opportunities of both
companies. A strategic combination would create a juggernaut
in the space that would be the unequivocal number-two player behind
eBay Enterprise. Instead of having the number- two and number-three
players (PFSW and SPDC) compete against each other for business,
this combination would create a number-two player with significant
scale, additional revenue opportunities, significant cost savings
opportunities, and potential multiple rerating. Given the
fragmented nature of the competition, we don't think this merger
would create any antitrust concerns.
The cost saving opportunities are particularly large in relation
to the size of both companies. Both company headquarters are
located a few miles apart creating an opportunity to reduce
duplicative real estate and back-office costs. A combination would
also reduce duplicative IT costs as well as call center expenses.
The number of warehouses could be optimized with the associated
labor and equipment savings. A combined entity would also be able
to reduce the significant freight expenses associated with the
business model.
We have endeavored to quantify these cost saving opportunities
and are conservatively estimating at least $12 million in the following buckets:
Cost
Savings
|
|
|
|
|
|
|
|
|
Real
estate
|
$1,000,000
|
Optimization of real
estate footprint
|
|
|
|
|
Sales and
marketing
|
$1,500,000
|
Duplicative
expenses
|
|
|
|
|
|
IT
expenses
|
$1,500,000
|
Duplicative
expenses
|
|
|
|
|
|
Public
company
|
$1,500,000
|
One public company
instead of two
|
|
|
|
|
|
Freight
|
$2,500,000
|
Because of increased
scale and leverage
|
|
|
|
|
People
|
$4,000,000
|
Duplicative expenses
including senior management, HR, accounting & other back office
functions
|
Total
|
$12,000,000
|
|
|
|
|
|
|
|
Achieving these cost savings would have a very material impact
on the valuation of the combined entity. Both companies currently
trade at around 10x forward EBITDA multiples, which we think
is relatively low for companies with a mostly recurrent
revenue base, 20% top line growth and even faster EBITDA
growth. The cost saving opportunities of $12
million that we have identified would therefore create an
additional $120 million of value
using the same 10x forward multiple. This represents a 30% increase
in value to the pro-forma market capitalization of the combined
entities ($120 million divided by the
sum of the market capitalization of PFSW of $190 million and the market capitalization of
SPDC of $215 million). Assuming a
no-premium merger based on each company's market capitalization,
both companies' valuations would share this upside on a pro-rata
basis and would therefore appreciate by 30%. We very much doubt
that PFSW or SPDC are working on any projects that could create
this type of step function increase in valuation.
There would be additional synergies and value creation
opportunities that we have not quantified but that would be equally
important:
- Increased market share – by becoming the unequivocal number-two
player in the space behind eBay Enterprise, we think that the
combined entity would increase its combined market share in a still
relatively fragmented market where reputation and scale matter. The
combined entity would compete more effectively against eBay or the
smaller players in the field.
- Cross-selling opportunities – PFSW has recently focused on
developing high-margin professional services, such as marketing
services or website development. These services could be sold to
SPDC customers.
- Additional cost-saving opportunities – an additional large
cost-saving opportunity would involve integrating the order and
warehouse management systems of both companies. While moving both
companies to one platform would create significant additional cost
savings on top of the ones we have identified above, we recognize
that this is not an easy task and we have therefore assumed that
the combined entity would continue working with two platforms. We
think that over time the new entity would move to one platform and
therefore create these additional cost savings; however, we have
not assumed that in our analysis. We think that the merits of a
merger are undisputable even without assuming this platform
integration.
- Increased valuation multiple – in our opinion, a combined
entity would deserve a higher EBITDA multiple than the individual
entities' multiples because of the increased growth profile and
higher return on capital (because of the higher margin) of the
combined entity.
Taking into account the cost savings opportunities, the
potential for revenue growth acceleration (through increased market
share and cross selling opportunities) and the increased valuation
multiple of the combined entity, it isn't difficult to envision at
least 50% upside to the status quo. Clearly, we think that the
strategic and financial merits of a combination are overwhelming.
While we are aware that both companies have had on-and-off talks in
the past, we think that a transaction in the past was
mathematically difficult to accomplish because the EBITDA multiples
of both companies were too far apart. As a result of the stock
appreciation of PFSW and the stock decline of SPDC over the last 12
months, the EBITDA multiples of both companies have now converged
to a point where a combination of both companies is doable.
The historical reason for not merging the companies is no longer an
obstacle.
In order to facilitate this transaction and remove any potential
conflicts of interest involving management, we would suggest that
each Company's board of directors form a special committee,
consisting of a small number of independent directors with its own
financial advisor to analyze the benefits of this transaction. We
would expect this merger to bring together the best of both
companies' management. As outsiders, it appears to us that
Mike Willoughby's strength lies in
operations while Richard Willis'
strength lies in Mergers and Acquisitions ("M&A"). We would
therefore envision the combined company to be led by Mike Willoughby as CEO with a particular focus
on day-to-day operations and by Richard
Willis as Chairman with a particular focus on M&A.
In conclusion, we think that the Boards of both companies have a
unique opportunity to create a significant amount of value by
combining the two businesses. We look forward to working
constructively with both companies and continuing our dialogue with
both management teams to facilitate such a transaction.
Very truly yours,
Arnaud Ajdler
Managing Partner
Engine Capital LP
ABOUT ENGINE CAPITAL
Engine Capital is a
value-oriented special situations fund that invests both actively
and passively in companies undergoing change.
Investor contacts:
Engine Capital LP
Arnaud Ajdler
(212) 321-0048
aajdler@enginecap.com
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SOURCE Engine Capital LP