Commentary: 7-Eleven should make its prospective buyer pay a lot more

LONDON: Everyone agrees the takeover battle for the Japanese owner of 7-Eleven is a watershed moment that could prove the Tokyo market is now open to foreign acquirers.
But for that to happen, the fate of Seven & i Holdings should be determined by the price of any bid, not the politics. And the convenience store operator needs to mount a defence that pushes Canadian suitor Alimentation Couche-Tard to pay up.
If it really wants to, it can.
Seven & i starts from a weak position. Its performance has been lamentable. Vulnerability is exacerbated by Japan’s recent relaxation of its takeover regime and the revival of its stock market after years of stagnation. An acquisition of Seven & i has gone from unthinkable to a potentially helpful demonstration of how people can make money in Japanese equities.
This may explain the cheapness of Couche-Tard’s US$14.86-a-share initial proposal. The approach is only around 20 per cent above Seven & i’s undisturbed share price – a low takeover premium on a stock that was already cheap.
Including net debt and lease obligations (US$18 billion, according to Bloomberg), the pitch is worth around US$56 billion. A seemingly big number. But it’s barely eight times expected profit as measured by earnings before interest, tax, depreciation and amortisation.
Couche-Tard, owner of Circle K, has traded on average at about 11 times the same metric over the last year. Other convenience peers trade on similarly rich valuations.
The pitch is even more unappealing considering that any deal would involve a tortuous US antitrust process. That calls for a tasty top-up to compensate for the wait and the risk.
Shareholders are so frustrated with Seven & i that they are nevertheless pushing for it to enter talks. They’re understandably scared of losing any chance to cash out. Seven & i is trying to sound like it’s not opposed to being bought, saying it’s “open to sincerely consider any proposal that is in the best interests of our shareholders”.
But the company needs to work more actively on getting the price up. Couche-Tard should be willing to pay a lot more if it’s made to. There is no better acquisition opportunity with the same strategic scale and scope for improvement.
Macquarie Group research calls this a “must-get deal”. Analysts at Royal Bank of Canada said a takeover would achieve Couche-Tard’s “longstanding objective of becoming the global leader” in convenience stores.
If Seven & i were based anywhere else, there’d be no shame in demanding a 50 per cent takeover premium for the shares and a valuation multiple a notch or two closer to peer valuations. That would push the total transaction value toward US$70 billion.
At that level, Couche-Tard might pause. An acquisition would bring around US$6.5 billion of added operating profit, based on 2027 consensus forecasts and TD Cowen research’s estimate of US$2.2 billion of synergies.
That’s not enough to generate returns exceeding Couche-Tard’s cost of capital in the short-term. But investors may well be patient given Couche-Tard’s impressive acquisitions record.
How to push Couche-Tard up? Forget the Seven & i’s designation of being “core” to Japan’s national security. The case rests on value.
The good news is that Seven & i has the right strategy: Focus on convenience stores and expand globally, jettisoning other formats. Governance has improved with the appointment of a chair separate from the chief executive officer role, along with an independent strategy committee. These developments followed pressure from activist ValueAct Capital.
What remains is to provide confidence around delivery. The company sent mixed messages in April, with contrasting statements on the future of its superstores giving the impression of internal disagreement. The company now says it has “actionable avenues” to unlock value. Time to show, not tell.
The quick win would be to sell all non-core holdings. A straightforward exit from superstores would be quicker and simpler than the initial public offering the company is considering. A near-50 per cent stake in Seven Bank, with a US$2.4 billion market capitalisation, could command a premium price.
Seven & i could also announce immediate moves to ramp up cost-cutting at 7-Eleven in the US. Its profitability is well below that of the Japanese business, even allowing for low-margin gasoline sales.
CEO Ryuichi Isaka may struggle to win over investors given the course of the stock under his tenure. It’s hard to change leadership in the middle of a bid situation, but the board could at least tie management’s pay far more rigidly to rapid implementation of the strategy.
Maybe there’ll be no deal and history won’t happen. If the only reason is that Couche-Tard was unwilling to pay a full and fair price, good.