Description

Despite increasing 43% today on the announced sale of its LiveArea business, PFSW could deliver a relatively safe 20-60% return in the next 3-9 months as it monetizes its last remaining asset “PFS.” Raymond James has been retained as an advisor and management is keen to consummate a transaction by 1Q21.

With net proceeds for LiveArea of $185-200mm, the remaining company is valued at 4-6x EBITDA using an adjusted Enterprise Value of $70-90mm and fully burdened PFS EBITDA of $15-$18mm. Comparable M&A transactions have occurred in the 8-13x+ EBITDA range, and those were mostly done in a less favorable environment. Additionally, the company has invested well over $100 million in the PFS business, and the market is currently valuing it at less than replacement cost.

While not the greatest trade, we believe it is a pretty optimal risk/return in the current market. Downside is minimal as the remaining business is valued below replacement cost, management is committed to a sale, and the process is seemingly 3-months in the making (as we believe management has been shopping PFS concurrently with LiveArea).

We think the opportunity exists for several reasons. PFSW has always been a relatively under the radar security and the announcement came on a day when the Russell sank 1.5%. We think most investors are out of touch with the story and have lost interest, especially after a multi-year period of management screwups.

On its 1Q21 earnings call, management stated “we always want to preserve the options that we have for generating shareholder value, and we think that this process we've been going through positions us to have the right options on the table with regard to shareholder value creation.” Despite seemingly telegraphing a transaction, the market gave little credit given management’s checkered history. With the hiring of Jim Butler to run LiveArea, the business went from unsellable to garnering a 2.9x trailing revenue multiple, the high end of the comp range. We think investors are equally asleep at the wheel regarding the PFS business.

Additionally, we also believe there could be some confusion regarding the share count and tax burden of a PFS sale. Based on our estimated valuation range for PFS, we believe there will be 23 million shares outstanding. We do not believe there will be any corporate tax on a sale of the company (rather, investors will be taxed on potential capital gains).

Our estimated combined value for the company is $13-18/share.

To help triangulate our PFS valuation estimate, we are relying on several data points. First, the replacement cost is well in excess of $100 million based on the investments the company has made in PFS over the years. Second, multiples for peer transactions have been around 8-13x EBITDA (and are likely higher in the current environment as market multiples have moved up). The low end has been primarily for pure play fulfillment players that are asset heavy, lower growth, and lower margin. PFS is operating at higher margins than many peers, despite the current pressures that have been well communicated.  The closest peers have sold in the 11-13x range (Trade Global, Newgistics, and Radial). These transactions also occurred when the industry (including PFS) was facing headwinds and the market multiples were generally lower. It is well understood from industry participants that those pressures will begin to abate in Q4, providing a solid fundamental outlook for potential buyers (management has communicated 5-10% annual service fee growth, which we believe has an opportunity to accelerate).

A final data point was recently communicated in Craig Hallum’s June 29^th morning sales email:

“Private comps ShipHero & ShipBob raised $50M at a $225M post money valuation and $200M at a $1B+ valuation, respectively. ShipHero’s valuation is similar to the EV of PFSW, despite the run-rate revenues of ShipHero being approximately 10% of the size of PFSW. Both raises were ostensibly driven by inbound demand for a way to invest in eCommerce (ShipHero more so than ShipBob). Ironically, PFSW has clearly suggested it is considering alternatives after legally separating its units and is a clear beneficiary of the same trends (i.e. DTC, wholly owned fulfillment centers and eCommerce software) that led to the investor interest.  Public investors have largely ignored the stock, which trades at just 9x FY22 Adj. EBITDA, which Sutton rates as a Buy.”  

Catalyst

Sale of PFS

Investor awareness