Engine Capital Delivers Letter To PFSweb And Speed Commerce

Engine Capital LP (together with itsaffiliates, "Engine"), a significant shareholder of each of PFSweb, Inc.(NASDAQ: PFSW) and Speed Commerce, Inc. (NASDAQ: SPDC), with ownership ofapproximately 4% of PFSweb and 3% of Speed Commerce, today announced that ithas delivered a letter to the board of directors of both companies. The full text of Engine's letter follows:December 29, 2014Members of the Board of Directors c/o Richard Willis, President & CEOSpeed Commerce, Inc. 1303 E. Arapaho Road, Suite 200Richardson, Texas 75081Members of the Board of Directors c/o Michael Willoughby, CEOPFSweb, Inc. 505 Millennium DriveAllen, Texas 75013Dear Board Members:Engine Capital LP, together with its affiliates ("Engine"), owns approximately4% of the outstanding shares of PFSweb, Inc. ("PFSW" or "PFSweb") as well asapproximatively 3% of the outstanding shares of Speed Commerce, Inc. ("SPDC"or "Speed Commerce"). Both PFSW and SPDC represent significant investments forEngine. We invested in both companies because of their attractive businessmodels (mostly recurrent revenue based on eCommerce transactions), high growthpotential (eCommerce is expected to grow significantly for the foreseeablefuture), and their reasonable valuations compared to their growth profile andcomparable transaction multiples. While we think that both companies havesignificant and exciting standalone prospects, we think that a merger of bothcompanies offers an opportunity to create significant additional value thatwould not detract in any way from the existing opportunities of bothcompanies. A strategic combination would create a juggernaut in the spacethat 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 anumber-two player with significant scale, additional revenue opportunities,significant cost savings opportunities, and potential multiple rerating. Giventhe fragmented nature of the competition, we don't think this merger wouldcreate any antitrust concerns.The cost saving opportunities are particularly large in relation to the sizeof both companies. Both company headquarters are located a few miles apartcreating an opportunity to reduce duplicative real estate and back-officecosts. A combination would also reduce duplicative IT costs as well as callcenter expenses. The number of warehouses could be optimized with theassociated labor and equipment savings. A combined entity would also be ableto reduce the significant freight expenses associated with the business model.We have endeavored to quantify these cost saving opportunities and areconservatively estimating at least $12 million in the following buckets:Cost SavingsReal estate $1,000,000 Optimization of real estate footprintSales and $1,500,000 Duplicative expensesmarketingIT expenses $1,500,000 Duplicative expensesPublic company $1,500,000 One public company instead of twoFreight $2,500,000 Because of increased scale and leveragePeople $4,000,000 Duplicative expenses including senior management, HR, accounting & other back office functionsTotal $12,000,000 Achieving these cost savings would have a very material impact on thevaluation of the combined entity. Both companies currently trade at around 10xforward EBITDA multiples, which we think is relatively low for companies witha mostly recurrent revenue base, 20% top line growth and even faster EBITDAgrowth. The cost saving opportunities of $12 million that we have identifiedwould therefore create an additional $120 million of value using the same 10xforward multiple. This represents a 30% increase in value to the pro-formamarket capitalization of the combined entities ($120 million divided by thesum of the market capitalization of PFSW of $190 million and the marketcapitalization of SPDC of $215 million). Assuming a no-premium merger based oneach company's market capitalization, both companies' valuations would sharethis upside on a pro-rata basis and would therefore appreciate by 30%. We verymuch doubt that PFSW or SPDC are working on any projects that could createthis type of step function increase in valuation.There would be additional synergies and value creation opportunities that wehave not quantified but that would be equally important: 1. 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. 2. 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. 3. 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. 4. 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 revenuegrowth acceleration (through increased market share and cross sellingopportunities) and the increased valuation multiple of the combined entity, itisn't difficult to envision at least 50% upside to the status quo. Clearly, wethink that the strategic and financial merits of a combination areoverwhelming. While we are aware that both companies have had on-and-off talksin the past, we think that a transaction in the past was mathematicallydifficult to accomplish because the EBITDA multiples of both companies weretoo far apart. As a result of the stock appreciation of PFSW and the stockdecline of SPDC over the last 12 months, the EBITDA multiples of bothcompanies have now converged to a point where a combination of both companiesis doable. The historical reason for not merging the companies is no longer anobstacle.In order to facilitate this transaction and remove any potential conflicts ofinterest involving management, we would suggest that each Company's board ofdirectors form a special committee, consisting of a small number ofindependent directors with its own financial advisor to analyze the benefitsof this transaction. We would expect this merger to bring together the best ofboth companies' management. As outsiders, it appears to us that MikeWilloughby's strength lies in operations while Richard Willis' strength liesin Mergers and Acquisitions ("M&A"). We would therefore envision the combinedcompany to be led by Mike Willoughby as CEO with a particular focus onday-to-day operations and by Richard Willis as Chairman with a particularfocus on M&A.In conclusion, we think that the Boards of both companies have a uniqueopportunity to create a significant amount of value by combining the twobusinesses. We look forward to working constructively with both companies andcontinuing our dialogue with both management teams to facilitate such atransaction.Very truly yours,Arnaud AjdlerManaging Partner Engine Capital LP ABOUT ENGINE CAPITALEngine Capital is a value-oriented special situations fund that invests bothactively and passively in companies undergoing change.Investor contacts:Engine Capital LPArnaud Ajdler(212) 321-0048aajdler@enginecap.com To view the original version on PR Newswire,visit:http://www.prnewswire.com/news-releases/engine-capital-delivers-letter-to-pfsweb-and-speed-commerce-300014193.htmlSOURCE Engine Capital LP