One of the largest e-commerce service providers, GSI Commerce, is the first company to make a major acquisition in the quickly growing channel of online private sales.

This story first appeared in the October 28, 2009 issue of WWD. Subscribe Today.

On Tuesday, GSI Commerce signed a definitive agreement to purchase Retail Convergence, the parent of private sale company Rue La La and off-price Web store Smart Bargains Inc., for $350 million in cash and stock.

The move will increase GSI Commerce’s revenue by about $230 million this year; GSI had revenues last year of $966.9 million. The deal gives Rue La La the infrastructure to expand quickly and globally, and positions GSI as a major player in the new channel. Online private sales already generate more than $1.3 billion in revenue a year worldwide and have attracted dozens of start-ups and tens of millions in venture capital investment.

“In terms of long-term potential, we believe the private sale business will be a multimillion-dollar business and we think we’re going to be a global leader in this business,” said GSI chief executive officer Michael Rubin. “There are only two companies that are doing a great job in the U.S.,” he said, referring to Gilt Groupe and Rue La La. “With us behind them, we will help take the business even faster and further.”

“Combining [our fast growth] with the deep relationships GSI has with retailers and brands around the world and their sophisticated infrastructure, we believe they’re going to turbocharge our ability to build this into a global company,” said Retail Convergence ceo Ben Fischman.

Retail Convergence will remain based in Boston, with no changes in management or operations, said both companies. Retail Convergence will take advantage of GSI’s infrastructure, such as its worldwide distribution centers in such locations as Canada and the U.K., and will start selling overseas in the near future.

When Rue La La hits the U.K., it will face Vente-Privee, the original online private sale company, which sells everything from designer apparel to cars, and had revenues of about 491 million pounds, or $813 million, in 2008. It started in France and sells in the U.K. and Europe.

Under the terms of the agreement, Retail Convergence will receive $180 million up front, with $90 million of that in cash, and another $90 million in 4.5 million shares of GSI stock. If Rue La La hits yearly targets for three years, it will receive $170 million more, mostly in cash.

At first, GSI thought to create its own private sale business, since it already makes e-commerce sites for brands and retailers, including private sales for its own brands’ customers, but quickly decided it would be better to acquire an existing business. GSI’s apparel clients include Burberry, Quiksilver and Levi’s.

“Our clients are looking for an additional vehicle to move more merchandise, one that introduces them to new customers,” Rubin said. “The thing that has been amazing about the private sale space is how engaged consumers are,” he said, noting that about 10 percent of members visit daily and 70 percent of members visit monthly. “I look at the private sale space as a new way to shop.”

Better to put GSI’s weight and muscle behind Rue La La with its 1.2 million members, he said. “I think many brands will use both services.”

Rue La La doesn’t only sell apparel, but also travel, beauty and other categories. Likewise, GSI’s customers include music, video, sporting goods and pet companies.

Retail Convergence has 184 employees and is expected to generate $230 million in revenues this year. In the year ended September 2008, the company lost $7.5 million, but over the next 12 months, cut its losses to $500,000. GSI said it expects the acquisition to be accretive to its earnings in fiscal 2010.

Gilt Groupe, which is on track to do $400 million in sales this fiscal year, received a third round of $43 million in venture funding in August. Rue La La had $25 million in backing.

This is not the first time an e-commerce service provider has ventured into private sales. Earlier this year, Onestop Internet Inc. of Rancho Dominguez, Calif., bought Billion Dollar Babes, an offline stager of limited-time multibrand sales, and built out their online private sale business. The company recently received $13.3 million in funding from Bessemer Ventures.


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