Lipoproteins are essential for bacterial survival. Bacterial lipoprotein biosynthesis is accomplished by sequential modification by three enzymes in the inner membrane, all of which are emerging antimicrobial targets. The X-ray crystal structure of prolipoprotein diacylglyceryl transferase (Lgt) and apolipoprotein N-acyl transferase (Lnt) has been reported. However, the mechanisms of the post-translational modification catalyzed by these enzymes have not been understood. Here, we studied the mechanism of the transacylation reaction catalyzed by Lgt, the first enzyme for lipoprotein modification using molecular docking, molecular dynamics, and quantum mechanics/molecular mechanics (QM/MM) calculations. Our results suggest that Arg143, Arg239, and Glu202 play a critical role in stabilizing the glycerol-1-phosphate head group and activating the glycerol C3-O ester bond of the phosphatidylglycerol (PG) substrate. With PG binding, the opening of the L6-7 loop mediated by the highly conserved Arg236 residue as a gatekeeper is observed, which facilitates the release of the modified lipoprotein product, as well as the entry of another PG substrate. Further QM/MM studies revealed that His103 acts as a catalytic base to abstract a proton from the cysteine residue of the preproliprotein, initiating the diacylglyceryl transfer from PG to preprolipoprotein. This is the first study on the mechanism of lipoprotein modification catalyzed by a post-translocational processing enzyme. The transacylation mechanism of Lgt would shed light on the development of novel antimicrobial therapies targeting the challenging enzymes involved in the post-translocational modification pathway of lipoproteins.