It’s not clear yet how much Couche-Tard, which is smaller than Seven & i, may propose to pay and structure any potential deal, or whether it is seeking a partial buyout. Still, the Canadian company’s plan will benefit from a potential ally: ValueAct Capital Management.
The activist fund has been pushing Seven & i’s management to narrow its focus to 7-Eleven stores, saying last year that they would be worth more as a standalone listed company, and sought to replace CEO Ryuichi Isaka. In response, he has taken restructuring measures and initiated a buy-back. But given the reaction among investors who bid up the company’s shares by 23 per cent on Monday when the news broke, a record one-day gain for the stock, it may be hard to justify any resistance to a takeover proposal.
“The main implication is that the stock is clearly undervalued,” said Rafael Nemet-Nejat a senior portfolio manager at Jin Investment Management Pte. The proposal “may also put pressure on the company to speed up restructuring as well, as the management is likely reluctant on foreign buyouts.”
If Couche-Tard ends up making a partial bid, gains could be limited and the shares could even drop, Nemet-Nejat added.
In a sign of investor scepticism, Seven & i fell as much as 12 per cent in early trading on Tuesday, paring Monday’s record gain.
It’s not clear whether ValueAct still holds any stock in Seven & i, based on data compiled by Bloomberg, which shows that they no longer own a stake. The investor, which had previously disclosed a 4.4 per cent holding in the Japanese company, may still have significant positions in part or in full through swap arrangements with brokers, which do not require stock exchange disclosure.
If successful, a Couche-Tard takeover of Seven & i would eclipse KKR’s ¥670 billion deal in 2022 to buy Hitachi Transport System, which at the time was the biggest full takeover by a listed Japanese business by a foreign entity. In that transaction, the private equity firm benefited from parent Hitachi Ltd’s desire to divest assets to focus on its core businesses.
But the history of attempted takeovers of Japanese companies by outsiders is messier.
KKR, CVC Capital Partners and Blackstone walked away from a buyout of Toshiba after meeting stiff resistance from the board. Concerns about the valuation, complexity and political nature of the deal were behind their decision, and eventually a consortium led by a domestic fund prevailed last September.
Hon Hai Precision Industry, better known as Foxconn, pulled off a deal in 2016 to take a controlling stake in Japanese electronics maker Sharp for ¥389 billion. The Taiwanese electronics contract manufacturer had pursued the Japanese company for years. Foxconn founder Terry Gou had lobbied Japanese lawmakers, co-opted banks and sweetened its offer to outmanoeuvre a Japanese government-backed bidder.
Three years ago, Chinese home appliance maker Guangdong Galanz Enterprise became the single biggest share holder in rice-cooker maker Zojirushi and sought to appoint new directors, which was rejected. The Japanese company subsequently adopted a “poison pill” defence against a potential takeover in 2022.
By the numbers, Couche-Tard’s proposal to buy Seven & i provides a mixed picture. Although Couche-Tard is smaller than Seven & i, with about 16,700 stores compared with more than 85,000 for the Japanese retailer, the Canadian company enjoys a bigger valuation of about US$58.5 billion.
Couche-Tard also carries more debt, and has less cash on hand than Seven & i. The yen’s decline, coupled with a 21 per cent drop in 7-Eleven owner’s stock since the end of February, also made the company more attractive to a possible suitor.
Even so, based on a multiple of 11.5 times earnings before interest, taxes, depreciation and amortisation, the deal value could go up to as much as US$86 billion, wrote Bloomberg Intelligence analyst Diana Rosero-Pena. That might be too much for Couche-Tard to do it alone.
Any proposal or formal offer will have to be attractive enough for Isaka and the board to take it seriously, according to Amir Anvarzadeh, a strategist at Asymmetric Advisors.
“Anything above ¥7 trillion, management would be under a lot of pressure, particularly by activist investors that have invested in the company,” Anvarzadeh said.